Condo market's strength has owners considering a shift to detached homes

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Spring could bring a shift in the Toronto area's real estate landscape as buyers and sellers take advantage of the shrunken gap between the prices of condo units and detached homes.

Since the condo market has held up better than the market for detached houses, Toronto real estate agent Manu Singh says he's been talking with many clients who are contemplating a move in the spring.

Meanwhile, he expects a fairly subdued market in the coming weeks. Buyers and sellers are both a bit apprehensive after a volatile Toronto market in 2017 and new rules surrounding a "stress test" for buyers seeking uninsured mortgages came into effect Jan. 1st.

By late February or early March, the spring market will bring a fresh spate of activity, Mr. Singh predicts, but he warns that buyers are likely to remain cautious for the first half of the year as they absorb policy changes – including a 15-per-cent tax on purchases by foreign buyers – introduced by Ontario in April.

"We've been hit with so much regulation," Mr. Singh says. "It's like we've been stomped on."

He currently has 11 clients who are planning to sell their condo unit and use the funds to move up to a detached house.

The price of a detached house in the 416 area code dropped about 20 per cent between April and December while the average condo unit in the core saw an 8-per-cent dip .

At the end of December, the average price for a detached house in the 416 stood at $1,250,235 compared with $1,578,542 at the end of April. The average price for a condo in the core was $532,700 at the end of December, compared with $578,280 at the end of April.

Mr. Singh says the shift makes sense for couples who have owned their condo for between three and five years and now have some equity built up. In many cases, his clients are double-income couples in their 30s who have been living in a downtown two-bedroom, two-bathroom condo of 1,000 square feet or more.

"They're sitting in a product that's more scarce," he says of the spacious condos they occupy. Downtown units typically have a one-bedroom-plus-den layout.

Some of the clients are planning to start a family while others have one child already and they are hoping to gain some room to spread out in a single-family dwelling with a backyard. In some cases, move-up buyers who can't make the jump to a detached will opt for a semi or a townhouse, he says. "The dream is for a detached, but prices are so out of reach."

Popular Toronto neighbourhoods for this cohort are Leslieville, Riverdale and the Beaches in the east. In the west end, some buyers are targeting Swansea and Bloor West Village. For those who insist on a recently-built detached that doesn't require renovation, Etobicoke is a good place to find them, he says.

The likely buyers for the condos will be the twenty-somethings coming up behind them who want to get a toehold in the market, says Mr. Singh.

Anita Springate-Renaud, a real estate agent with Engel and Völkers in Toronto, is also finding the market off to a slow start in 2018. In addition to the new rules, she suspects buyers have had some of their enthusiasm sapped by frigid temperatures and blasts of icy precipitation.

She adds that there has been some confusion surrounding the new rules by the country's banking regulator. The Office of the Superintendent of Financial Institutions now requires the lenders under its watch to give buyers a "stress test" to ensure that they can afford to repay their mortgage loans in the face of rising interest rates.

First-time buyers in richly-priced markets such as Toronto and Vancouver are likely to feel the greatest impact, market watchers say.

Ms. Springate-Renaud says first-time buyers in Toronto may feel discouraged because it's already so tough for them to get into the market. "I think we'll have a slow start," she says of the opening months of the year. "It's not going to be crazy."

She expects that the market will adjust to the stress test in a reasonably short time. Some young buyers may rely more heavily on their parents for help with a down payment or in co-signing a loan, she adds.

Mr. Singh has heard from clients who have the misperception that they actually have to make higher mortgage payments. In reality, they just need to show that they have the financial muscle to do so. "Forget about the equations – the psychological impact is really keeping buyers more hesitant."

By the fourth quarter of 2018, he predicts, "regulation fatigue" will wear off.

Mr. Singh has been meeting with clients in Hong Kong and Malaysia while the market remains slow in Canada. He says foreign buyers make up a very slim share of the Toronto market and the tax imposed by the provincial government isn't much of a deterrent. Most of the investors he knows have strong reserves in their home country and they view Canada as a safe and stable country.

The recent policy changes only bolster that view, he says, adding that overseas buyers keep an eye on the political turmoil under the Trump administration in the United States. "That always makes us look good."

It's not clear how potential buyers will respond to recent increases in interest rates but most industry watchers do not expect rate hikes to have a large impact in the short term because rates are still relatively low compared with historical norms.

Mr. Singh points out that higher interest rates generally come with stronger economic growth and a healthy outlook for jobs so consumers aren't likely to become discouraged.

The Canadian Real Estate Association reported this week that the country's housing market posted its fifth consecutive monthly increase in December to fully recover from the slump last summer. CREA chief economist Gregory Klump says some sales were likely pulled forward as buyers signed deals ahead of the OSFI rule changes. "It will be interesting to see if monthly sales activity continues to rise despite tighter mortgage regulations that took effect on Jan 1," he says.