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To help us understand where Toronto’s real estate market is headed in 2023, here are 6 key things we’re watching, along with our predictions.

Not an actual crystal ball. But actually me.

– Melanie

Inflation and Interest Rates

2022’s unprecedented inflation and our government’s response to it – a series of aggressive interest rate hikes – had an immediate and significant impact on the Toronto housing market. In just a few months, we erased almost a year of price gains and saw the volume of sales in the Greater Toronto Area fall by almost 50%. While most of the market correction happened in March-June 2022, the new lower prices and volume continued throughout the last half of the year. 

Historically, the full impact of higher interest rates isn’t seen for 12- 18 months, so we can expect last year’s rate hikes to continue to cause some pain this year as people continue to adjust their spending, and companies realign their resources, staffing and production. Most economists don’t think the rate increases are over yet either, with most predictions suggesting one or two further hikes on the horizon.  

The Bank of Canada releases policy interest rate decisions according to a pre-determined schedule. For 2023, announcements are scheduled for January 25, March 8, April 12, June 7, September 6, October 25 and December 6. 

Our 2023 Prediction 

We expect inflation to continue to decrease slowly and as a result, we expect interest rates to remain elevated throughout 2023. We won’t be surprised by another rate increase or two, though we expect rates to stabilize near where they are now and remain there for most of the year. 

Buyer and Seller Psychology 

When you’ve worked in real estate as long as we have, you know that what actually happens in the real world doesn’t always align with economic facts and figures and what economists predict should happen. What buyers and sellers are thinking and feeling is just as important – if not more important – than the economic fundamentals. 

In 2022, buyers and sellers were caught off-guard by the pace and size of Canada’s interest rate hikes. We’d somehow normalized the low pandemic-era interest rates;  instead of seeing them as a once-in-a-century event, we came to expect them. The resulting whiplash as rates increased resulted in a lot of people just watching and waiting to see what would happen next. 

Our 2023 Prediction

Much like people came to normalize the 2% interest rates during COVID, they are starting to accept the new interest rates too. We’re already seeing previously ‘paused’ buyers jump back into the market, albeit with slightly different budgets and needs. 

The biggest boost to buyer confidence will happen when interest rates stabilize. We predict that we’ll see a significant uptick in buyer activity after one or two consecutive interest rate cycles with no new increases.

Real estate decisions aren’t just made with facts and figures – they’re made with emotions and heart, and for real lifestyle reasons. Sure, the economy has changed – but the need for a bigger/smaller/different house or condo still remains. Almost 50,000 fewer homes were sold in 2022 than in 2021, and 20,000 fewer than in 2020 – that pent-up demand is still out there. As soon as the economy feels a bit less precarious, we expect buyers to jump back in (probably all at the same time, lol). 

Distressed Sellers

Distressed sellers don’t just want to sell – they need to sell. Distressed sellers are more likely to accept lower prices and increase the supply of homes on the market. While we didn’t see many of them in 2022, it’s definitely one of the risk factors for our market heading into 2023. We’re specifically monitoring: 

  • What’s happening when people renew their mortgages? In 2018, the federal government mandated a new ‘stress test’ for mortgages to help protect against rising interest rates in the future. Essentially, new mortgagees had to qualify at rates that were 2% higher than current rates, so that if/when rates went up, they’d still be able to afford their mortgage. While everyone hated the stress test at the time, it did what it was intended to do: it protected a lot of people from the now-higher interest rates. The risks for 2023?
    • Some homeowners will be facing rate increases higher than what they were stress tested for and may struggle to make their payments
    • If homeowners want to move to a new lender when their mortgage comes due for renewal, they’ll be stress tested again at current rates. 
    • How flexible will lenders be with extending amortization and finding creative solutions to help distressed homeowners stay in their homes? 
  • Employment, Job Vacancies and Layoffs Despite a messy economy in 2022, Canadian employment numbers continue to be strong. Pre-pandemic, there were six unemployed people for every one job vacancy. In December 2022, there were nearly 1 million unfilled positions across the country – or one unemployed person for each unfilled position. Will GTA job vacancies continue to be able to absorb the people being laid off? 
  • Investors and Mom-and-Pop Landlords. With everything from utilities to home maintenance to mortgages being more expensive these days, the current state of the economy is certainly affecting landlords. To balance that, Toronto rents are up significantly (28% since January 2022), but most landlords can’t adjust rents as fast as their expenses increase. Small-time landlords or over-extended investors may choose instead to lock in their gains and cut their risks by selling in 2023. 

Our Prediction for 2023

We think we’ll see more distressed Sellers than in 2022; while it will be extremely difficult for them personally, we don’t anticipate that there will be enough distressed sellers to affect the overall health of the market. We think Toronto homeowners and investors will continue to value their real estate assets and do everything they can to keep them. 

Inventory

Despite lower prices and sales volume, the GTA is still suffering from an inventory problem – there aren’t enough homes for sale. In 2022, there were 8.6% fewer homes listed for sale than in 2021.

Because most sellers are buyers too, the real estate market can be a bit of a Catch-22. People don’t want to list their current home for sale without knowing they’ve secured a new one, but with so few homes for sale, they can’t find a new one. It’s hard to escape the hamster wheel. 

We’re closely monitoring inventory levels as we head into 2023, specifically watching for:

  • Increased listings by distressed sellers 
  • Increases in investor-owned condos being listed for sale
  • What happens to the record 32,000 new condo units being completed in 2023

Our Prediction for 2023

We think the market will continue to feel unpredictable during the first quarter of the year and sellers will continue to ‘wait and see’, vs list their homes for sale. That will help support the prices of the homes that are listed for sale and result in competitive bidding wars on the best properties. 

By spring, we think one of two things will happen:

  1. Interest rates will have stabilized, the buyers will be back, and sellers will rush to list their homes for sale; or
  2. The sellers get tired of waiting and just want to move on with their lives; they list their homes for sale and accept that the process will be less predictable than it used to be.

Government Intervention

We saw an unprecedented level of government intervention around housing in 2022, though much of it was too little, too late (for example, the long overdue changes to the Real Estate and Business Brokers Act (REBBA) via the Trust in Real Estate Services Act (TRESA), or simply political pandering (the 2-year ban on foreign buyers), or both (the vacant home tax). 

Our Prediction  Hope

It’s time to increase mortgage amortization periods to help first-time home buyers and people renewing mortgages. It’s time to re-think the 2% stress test (at least for fixed-rate mortgages). It’s time to monitor the lenders to ensure they are supporting their distressed clients and not just profiting from them. It’s time for our cities – who have become so dependent on land transfer taxes – to support their resident homeowners. 

Home Prices and Sales Volume

The number one thing most buyers, sellers and homeowners care about is $$$ – how much is my home worth now? While the downward market shift was harsh from March-June 2022, prices mostly levelled off for the remainder of the year. 

Our Prediction for 2023

Our prediction for what happens to home prices in 2023 is, of course, dependent on our other predictions coming true. To recap, we think:

  • Interest rates will stabilize by the end of Q1
  • Buyer confidence will continue to return, buyers will accept the new interest rate levels and pent-up demand will drive more sales 
  • Sellers will continue to restrict inventory, especially during the first quarter
  • There will be more distressed sellers than in 2022 – but they won’t be numerous enough to really impact the overall market
  • Our governments and lenders will support homeowners through more favourable policy and flexibility

We expect prices to be relatively flat in 2023, with the City of Toronto continuing to perform better than the suburbs, and condos continuing to perform better than detached houses. We expect the number of homes sold to increase significantly above 2022 levels, though still lower than 2021 levels. We expect things to normalize in 2023…and for the market to be more balanced. 2023 won’t be a stellar real estate year, but it won’t crash and burn either. 

I predict that 2023 will be the year that Torontonians finally discover that real estate isn’t actually a hobby; owning a home isn’t just an investment or retirement plan and most importantly, where you live impacts how you live. 


So there you have it…our thoughts and predictions about Toronto’s real estate market in 2023. What do you think will happen?

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