The Toronto Real Estate Board (TREB) is forecasting another strong year for home sales in Toronto, according to its second annual Market Year in Review & Outlook Report. Between 104,500 and 115,500 home sales are expected this year, with a point forecast of 110,000 – down slightly from 113,133 sales reported by GTA REALTORS® in 2016.

"While changes to federal mortgage lending guidelines and higher borrowing costs may impact some would-be home buyers, the big impediment will be the lack of inventory.  Active listings at the end of December were at their lowest point since before the year 2000. It is unlikely that the shortage of listings will improve to any great degree over the course of the next year. This will put a ceiling on sales growth," said Jason Mercer, TREB's Director of Market Analysis.

As a result of very strong demand for ownership housing up against an extremely constrained supply of listings in 2017, double-digit annual rates of price growth are expected to remain in place for the majority of home types across the GTA. The growth rate for the average selling price will be between 10 and 16 per cent with an average price range between $800,000 and $850,000. TREB's point forecast for the average selling price is $825,000.

Low-rise home types, including detached and semi-detached houses and townhouses, will experience the strongest annual rates of price growth, but the condominium apartment market segment will remain tight as well.

Despite relatively large down payment percentages, home price growth has obviously been a concern from an affordability perspective. The policy reaction to date has been focused on the demand side of the price growth equation. Changes to federal mortgage lending guidelines and ruminations about a foreign buyers tax for the GTA dominated the headlines in the second half of 2016.

A foreign buyer tax in the GTA would be misguided. In order to obtain actual empirical data on foreign buying activity in the GTA, as opposed to conjecture, TREB commissioned Ipsos in November 2016 to survey its Members, who acted on behalf of home buyers during the preceding 12 months, as to foreign buying activity in the region. Key findings were as follows:

  • Only an estimated 4.9 per cent of GTA transactions, in which TREB Members acted on behalf of a buyer, involved a foreign purchaser.
  • The great majority of foreign buyers purchased a home as a primary residence (40 per cent), to rent out to tenants in an extremely tight GTA rental market (25 per cent), or for another family member to live in (15 per cent).
  • Less than 2 per cent of REALTORS® had been involved in a transaction for a foreign buyer which they knew was impacted by the foreign buyer tax in British Columbia.
An additional land transfer tax on foreign buyers could have unintended consequences, including:
  • Tighter market conditions and stronger price growth in neighboring communities/regions without a tax;
  • Less rental supply, because the number of investors looking to purchase and rent out a property could decline; and
  • A potential negative impact on immigration. It is important to remember that population growth in the GTA, on net, is driven by immigration.

"Housing affordability, and affordable home ownership in particular, is a growing concern," said TREB CEO John DiMichele. "Home prices will increase well above the rate of inflation and income growth in 2017, as the supply of listings remains very constrained. While governments have been focusing their policy solutions on allaying demand, what is needed are policies that focus on the lack of available homes for sale and for rent. The public, private, and not-for-profit sectors need to come together to focus on innovative solutions to the housing supply issue."

First-time buyers

Ipsos, on behalf of TREB, undertook a home buyers survey in November 2016. The survey focused on consumer buying intentions in 2017. Compared to a similar survey conducted at the end of 2015, the number of likely buyers was down slightly. However, GTA households still seemed upbeat about ownership housing. This included first-time buyers, whose share of overall buying intentions increased to 53 per cent from 49 per cent a year earlier. Although there may be a slight decline in sales from 2016, and in spite of the affordability issues that surround housing in the area, first-time buyers are expected to continue to account for more than half of the home sales in the GTA. This activity would suggest that these consumers have a Strong first-time buyer activity points to confidence in home ownership as a quality investment.
The bulk of prospective home buyers were located in the City of Toronto, while less than half of those people intending to buy their first home were located in the regions surrounding the City of Toronto. The higher share of first-time buyers in the City of Toronto is likely to be related to the high volume of condominium apartments that have sprung up in the area over the last decade. Condo apartments are a logical entry point for first-time buyers due both to this market segment’s price point and the fact that condo apartment developments are very often situated in centrally-located areas, close to either work, recreational activities, transportation, or all of the above.
Regardless of where in the GTA prospective buyers are looking to buy a home, the share of buyers who are looking for and wanting to purchase a detached home declined compared to the 2015 survey results. Double digit growth in home prices, and the ramifications on affordability, as well as the sharp drop in available listings likely fed into respondents’ home type preferences.

The Ipsos home buyers survey confirmed that likely home buyers are expecting to see strong home price increases in 2017. However, Ipsos also found that the average home buyer is planning on making a substantial down payment – 27.6 per cent for all recent home buyers combined and 23.9 per cent for first-time home buyers. The sources of home buyers' down payments were also quite diverse, including savings within and outside an RRSP, gifts from friends/family and equity built up in their current dwelling.
Mortgage expectations

Approximately 60 per cent of would-be buyers expect to get a fixed rate, closed mortgage, and the most popular term was five years. Although fixed interest rates rose slightly at the end of 2016 due to rising bond yields, they remained below three per cent – something that TREB doesn’t believe will hold in 2017, when bond yields are expected to rise further.
“TREB’s estimate of the forward rate for the five-year Government of Canada bond points to a further increase of 25 basis points by year-end. If this increase in the five-year yield were to be passed on in its entirety by lenders, advertised five-year rates could approach or even edge past the three per cent mark,” the report reads.
And given that the survey was taken at the end of the year, shortly after the new mortgage rules went into effect, there’s still some uncertainty as to how buyers’ expectations of the homes and mortgages that they will get in 2017 match up with the tightened mortgage regulations that only went into effect in October. The full implications of those decisions are undoubtedly yet to come.

This report looks ahead to the housing market for the year, and outlines issues such as consumer relations, foreign buyers, the impact of transportation infrastructure on housing affordability, and the lack of housing supply. It was released as part of TREB’s Economic Summit, which featured a panel discussion focused on how the supply of housing impacts affordability in the GTA. While the panelists had differing viewpoints, they all agreed that the supply issue in the GTA will not be solved without innovative solutions from the public, private, and not-for-profit sectors.
In addition to analyzing market fundamentals influencing demand, supply, price growth, and, ultimately, affordability, TREB had Canadian Centre for Economic Analysis undertake a study on how improved transit infrastructure, and particularly the Metrolinx Regional Express Rail plan, can impact housing affordability. The study found that the impact of RER on affordability is largely positive in the regions making up the GTA and surrounding GGH, especially when residents take advantage of the new transportation infrastructure and switch their mode of commuting. Improved transit infrastructure can also add price premiums of up to 12 per cent to a home's value.
Related stories:
Toronto ends 2016 with a bang
What the new mortgage rules mean for first-time home buyers, Part 1

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