January 2013 Market Review

The Toronto Real Estate Board (TREB) has released the numbers for January, 2013. As is so often the case in Toronto, a decline in the number of sales (volume, down about 1%) coincided with an increase in the value of sales (price, up 4.3%).

Of course, it’s the price that matters. (Buyers and sellers of houses negotiate price, not volume.) An increase of 4.3% over January of 2012 represents a decent, yet affordable, increase. It certainly disproves (for the umpteenth time) any assertion that the Toronto real estate market is on an unsustainable track. Quite the contrary. Not only is price appreciation reasonable and (more or less) stable, but the number of buyers ‘on the ground’ in Toronto indicates that the upcoming spring market will be another busy one, which will provide more price support. In fact, the bigger risk for buyers is competition from other buyers, which creates price pressure. If you are waiting for a price correction or – Heaven forbid! – a crash, your wait will continue for the foreseeable future.

On that note, I must advise caution to anybody in Toronto who wants to relocate within the city this year (i.e. move up/downsize). No matter what you read or hear elsewhere, I strongly suggest that you buy first, rather than sell first. Unless you have unusually strong motivating circumstances, you should take your time and find a great house or condo to buy – one that you are sure will suite your needs. Selling will be the ‘easy’ part. (Of course, I say that knowing that you will properly prepare for market, and that includes putting a market-based price on your home.) Even if prices flatten out (due to tighter mortgage rules, or the on-going effect of negative commentary coming from outside the industry), the tightness of supply will remain a challenge.

Over the past year I have heard too many stories of sellers getting squeezed out of the ownership market and into the rental market – and they are not good stories. The rental market is extremely tight now, so it’s not a given that you would be able to simply substitute a short-to-medium term rental for a resale home. Don’t assume that the rental market will provide you with an adequate alternative. The inconvenience of moving twice within about a year might be the least of your concerns…. Add to that the effect of being on the outside looking in, as prices increase another 3-6% this year (TREB at the low end, me at the high end), and you have a miserable scenario. Fortunately, it’s easy to avoid for most homeowners.

In the past, when we had a relatively ‘liquid’ re-sale market, the question of whether to buy or sell first was a matter of personal preference. With the super tight market today, the former luxury of selling first is fraught with risk. Ironically, it was the question of ‘risk’ that made some folks want to sell first: the need to be sure of the budget on the buy side. The answer today is simply to budget more conservatively. If we think your current house or condo will sell for $500,000, perhaps you should budget only $475,000. (I’m totally making up these numbers to illustrate the point.) If you had been thinking of spending $700,000 on a purchase, it may be wise to scale that back to $675,000. The buffer wouldn’t have to be huge – in part because you wouldn’t want to fail to meet the overall objective of buying a more suitable home; in part because the risk of selling below market is negligible. The point is simply to be cautious and avoid trouble.

Of course, by following my advice you would be contributing to the on-going supply problem! However, each owner (or set of owners) must manage their own risk in a way that best suits them. I believe that, over time, the number of listings will naturally rise to a more sustainable level, and the log-jam will ease. For now, though, it’s important to be careful.

By the way, no matter what else the Toronto real estate market does, I’m still advising my clients to consider purchasing an investment property. The tight rental market is causing rents to increase due to competition (when units become available to new tenants, that is), which is good for owners. The idea is to have an income-generating investment down the road – and perhaps supplement your income now. It’s working for some of my clients. Call me if you think it could work for you, too.

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