During the first half of 2012 we had a very hot (maybe even superheated) market, with crazy bidding wars everywhere. Then in July the government introduced new mortgage rules, most notably limiting amortization to 25 years for insured (less than 20% down) mortgages. This led to a marked slowdown with fewer sales than in the second half of 2012 and a steadily rising inventory of homes for sale. Average prices remain higher than in 2011, but the gap is narrowing somewhat.
1. Interest Rates – On December 12, the US Federal Reserve Chairman, Ben Bernanke, announced that interest rates would be held at the current near-zero level as long as the unemployment rate remains above 6.5%. It was already very unlikely that we will see any increase in mortgage rates during 2013, and this announcement has made it extremely so.
2. The Economy – The Canadian economy is expected to continue growing next year, although at a relatively slow rate, about 2%. While the Canadian economy has done reasonably well by comparison with most of the developed world, there are significant concerns about the US economy as well as the debt issues in Europe, and this has led to a decline in Canadian consumer confidence over the past couple of months.
3. Employment – The unemployment rate has fallen steadily since 2009 and should continue to improve (albeit slowly) next year.
4. Household Income – Incomes have also been improving, and should increase by 2-3% in 2013. This, combined with low and stable interest rates, means that affordability will continue to slowly improve next year.
All of this information, taken together, suggests that the Toronto real estate market in 2013 will continue to be healthy, though not as strong as in 2012. The inventory of homes for sale will be a bit higher, prices will rise more slowly (perhaps around 2-3%, in line with rising incomes), and there will be fewer and less crazy bidding wars. If so, then 2013 will be a very good year indeed, with the hoped-for soft landing tidily engineered by the government’s gentle tap on the brakes though tighter mortgage rules.
The only fly in the ointment is the condo market. As the inventory chart shows, there are a lot of condos presently for sale, almost 4 months’ supply, and this is well into buyers’ market territory. Condo prices are already beginning to decline relative to last year, and that seems likely to continue next year, with so many new developments coming to completion. This is quite different from the freehold market, where inventory levels are much more balanced and prices remain above last year. The condo market could therefore be somewhat chaotic in 2013.