The projections are in for 2007 from the Canadian Mortgage and Housing Corporation. Throughout the year we’ve been reading about the slowing real estate market in the United States. Regardless of the very specific reasons why various geographic areas of the US were encountering a market correction, the Toronto media continually inferred that our market was bound for the same place.
Surprise, surprise! It didn’t happen! The Toronto Real Estate Board stats for the year showed 83,084 sales, the third best year ever for TREB. In 2004 there were 83,501 sales and 2005 had 84,145. To put those numbers in perspective, 2003 had only 78,898 sales, almost 6% lower.
So why didn’t Toronto’s sales react like the media predicted? Well, there are a number of reasons, mainly dealing with three economic factors… the strength of our local economy, the cost of borrowing for mortgage financing and affordability of our Toronto housing stock.
Canada Mortgage and Housing Corporation (CMHC) has for years made very accurate predictions every December for what they believe will happen in the GTA real estate market in the following 12 months.
Employment
For 2007’s Toronto economic outlook, they’re predicting continued steady job growth. Because the labour market here is very tight, in-migration also will continue. All of this labour activity provides cash which in turn stimulates our economy and housing demand.
In fact, Toronto stats show that 8% of households are ready to buy this year while another 5.4% are contemplating it.
Interest Rates
Mortgage interest rates, the second important factor which influences housing affordability, are predicted to stay where they are in the mid-6’s for the posted 5-year rate.
As a comparison, in early 2000 the 5-year posted rate was in the 8.5% range. We hit ‘bottom’ three times in the summer of 2003, February 2004 and summer of 2005 at around the 5.6% posted rate (usually the discounted rate is 1.0% to 1.2% below the posted). Although we’re almost 1.0% above that low, it’s still a very attractive rate.
Longer Amortizations
Another mortgage factor which influences affordability is the introduction in 2006 of longer amortizations for our Toronto mortgages. Traditionally we’ve had 25-year amortizations (meaning if the interest rate was constant for a full 25 years, the mortgage would be paid off in full at the end of that period) while the US has usually had 15- and 30-year amortizations. A longer amortization reduces the amount of each monthly mortgage payment, although it results in a higher overall amount of interest being paid to the lender over that extended period.
Now we can arrange 30- and 35-year amortizations thereby making mortgage payments on higher priced homes lower and therefore more affordable to more people.
More Condo Options
The other factor affecting affordability in our Toronto real estate market is the continued construction of condominiums in the downtown core and in the surrounding suburbs. Approximately 50% of these suites are one-bedroom and one+den’s. These units are generally affordable for the single buyer or the young couple who are just starting out together.
Now, in case you were getting worried that we’re all going in debt up to our ears here in Toronto, CMHC statistics show that 51% of house or condo buyers will have over 25% down payment. Of course this is age related… only one-third of buyers in the 25-34 year age range will have over 25% down. These numbers are significant though because they show that a large segment of the market could weather an economic downturn if it did ever occur.
Summary
To summarize, the projections for 2007 are that total resales will drop… but only by about 3-4%, still leaving it in the top 4 years of TREB sales. Now, pay attention fence sitters… the rate of appreciation will decline, but homes will still be appreciating by about 3.6% in 2007. In other words, if you don’t buy sooner rather than later, it will cost you more money!
The average sale price in the Toronto area was $351,941 in 2006, up from $335,907 in 2005. CMHC predicts that the 2007 average will be approximately $365,000.
So… pretty positive I’d say. If listing inventory remains at 2006 levels there’ll be plenty of choice for home buyers and existing home owners will still be gaining appreciation over what they originally paid.
Overall a healthy, moderately appreciating market where there’s NOT massive, unsustainable appreciation but where there’s plenty of choice for brand-new and move-up home buyers and continued good, solid reasons for someone to purchase a home in Toronto and the surrounding communities!
