Toronto Real Estate's Harsh New Reality: Buyer Beware

Until recently, Greater Toronto’s housing market had been something of a fairy tale. Years and years of price growth convinced many that buying into the market — at any price — would pay off. In essence, a house in Toronto had become a miracle investment: no matter what happened, you made money.

But now, with home sales in the metro area down nearly 40 per cent over the past year, and prices down 14 per cent in that time, the market is doing something it hasn’t done in a good three decades: It’s creating losers.

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The Toronto Star reported recently on a group of buyers of pre-sale homes in Oakville, who made down payments in February 2017 (just before the peak of Toronto’s house prices) and who are now stuck with the bill for homes they can no longer afford.

Their current homes can’t be sold for the amount they expected last year. With new government-mandated mortgage stress tests in place, and lenders re-assessing the value of GTA properties, they can’t get mortgages to cover the full amount. They fear they may get sued by the developer, Mattamy Homes, if they don’t close on their deals.

They are not the only ones to face financial pressure from a slowing market. According to a report from CIBC and real estate consultancy Urbanation, released Friday, many of the city’s condo investors are now losing money.

The study found that nearly half of the condos delivered in 2017 — 48 per cent — were bought by investors. And of those, nearly half — 44 per cent — have “negative cash flow,” meaning rental income isn’t covering the costs of ownership, such as mortgage and condo fees. (Some 80 per cent of investors have a mortgage, so leaving units empty isn’t a good option for most.) And more than a third of those losing money are losing more than $1,000 a month.

So is it time to panic? No. Or, well, not yet. For those who bought well before last year’s peak, the math still adds up nicely. Most homeowners would not be underwater on their mortgages if they sold today. Most condo investors have made large gains in the resale value of their properties over the past several years, even if for many rent isn’t covering costs.

And even if all the investors who are losing more than $500 a month bailed on the market, they would increase housing supply by only 3.4 per cent of the total, the CIBC/Urbanation report estimated — hardly enough to flood the market and tank prices.

But the lesson here is that things have changed, and the housing market going forward won’t be like the housing market of recent years. Rapid house price growth is unlikely, if for no other reason than governments are now actively fighting to stop it.

For some investors, that could be bad news. The CIBC/Urbanation study estimates that an investor who buys a typical condo today will need to see 17 per cent growth in rental rates to make money off that condo when they take possession in 2021. If mortgage rates rise by a single percentage point, they’ll need 28 per cent rental growth. It’s possible to get that, but it’s by no means guaranteed.

And for those who buy pre-sale homes, it means scaling back your ambitions. You can’t be sure that your home will sell tomorrow for as much as it would sell today, as those buyers in Oakville have learned. Nor can you be sure that you’ll get a mortgage tomorrow that’s as large as the one being offered today, because mortgage rates are on the rise, and regulators could tighten rules again.

So in essence, it means we now have to take to heart an old adage that has been long forgotten in Toronto’s real estate market: Buyer beware.