After more than two years of bidding wars, bully offers and rising home prices, buyers, sellers and even some real estate agents are trying to divine the best way forward in a market that has cooled dramatically.

The Toronto Regional Real Estate Board (TRREB) reported Friday that home sales were down nearly 40 per cent year over year in May. Although prices were still up on an annual basis, the average house or condo sold for $121,000 less than in February. That’s when the market peaked at an average selling price of $1.33 million.

The Toronto Star asked four real estate watchers about the mindset of buyers and sellers under current market conditions and how long the downward trend is likely to last. Here’s what they said:

Rising costs of inflation

Real estate and infrastructure professor James McKellar at the Schulich School of Business at York University says consumers are being hit with higher prices on every front — food, gas, cars. That “brings a certain nervousness into the housing market.”

But unless there is a recession that threatens the GTA’s high employment rate, he doesn’t see prices falling too dramatically or even for very long. McKellar says the good news is that the current cooling is helping squeeze speculators out of the market.

He said suburban houses — the ones that rose so rapidly in price during the pandemic and are now seeing the greatest declines — will survive because people are still going to want more space than downtown condos provide.

Without a structural shift in which Toronto starts building more midrise apartments, McKellar says the city is likely stuck with high home prices because of limited supply.

“Within about two decades 35 or 40 per cent of households will be over 65. I’m not sure if they’re the people that want to live on the 72nd floor.”

Market rebound

Phil Soper, CEO of Royal LePage, notes that home sales have been flat or falling since November, but a market correction is only now beginning to take hold so the traditionally slower summer will likely be slower than usual this year.

How long the slowdown lasts depends on how long people who were ready to buy but discouraged by the home prices escalation amid bidding wars, are willing to wait to jump back into the market.

When that happens, sales will even out on a year-over-year basis. “And when sales are rising that will get reported and the psychology associated with the market correction will start to reverse,” said Soper.

He expects that to happen by spring 2023 at the latest. Soper said he can see prices rebounding in the single digits, maybe as high as 10 per cent, but nothing like the double-digit escalation of the pandemic.

Soper doesn’t expect the GTA will see year-over-year price declines in the correction.

“It’s too extreme,” he said. “There are very few people who would sell a Toronto home at a deep discount. They would have to be a distressed seller, relocating or going through a divorce,” he said. Otherwise, sellers will wait for the market to shift back up.

Climbing interest rates

John Pasalis, president of Realosophy, a data tracking real estate brokerage in Leslieville, says the slowdown is a double economic shock instigated by both the high escalation of home prices and climbing interest rates.

“Two years ago, the central bank basically pinned rates to the floor which is a lot like hitting the accelerator right to the floor of the housing market. We saw the effect of that. Prices exploded 50 per cent in two years. Now they’re doing the exact opposite, which is slamming the brakes suddenly. When you slam the brakes suddenly on the housing market, you’re going to get whiplash. It’s just natural,” he said.

Pasalis says the full impact of the Bank of Canada rate increases has yet to be felt because many buyers are still holding lower rate offers from their lenders. But once those expire, he said, “we’re going to really start to feel if this market can maintain these price levels at these much higher interest rates.”

“There’s a lot of concern that they can’t. It’s a lot harder to pay today’s prices if you’re paying four per cent whereas last year people were paying 1.5- or two per cent,” he said.

He thinks the most likely scenario for this fall would be that prices level off or there is more downward pressure.

“We’re seeing a lot of rapid downward pressure because a lot of sellers got caught. They bought and they need to sell. By the fall you’re going to have fewer of these distressed sellers. We’re going to see probably less big downward pressure on prices, but we don’t know how what the demand is going to be.”

Add to that the likelihood of another 50-point rate hike in about six weeks, he said.

Pasalis says a lot of buyers are happy they can afford a home now. Three months ago they couldn’t get one for under $1 million. Added to the pervasive optimism about the housing market over the long-term — “That’s really what’s driving the demand we’re still seeing right now,” he said.

Price correction

Hilliard MacBeth, financial adviser and author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash, says he wrote his book (now in a second edition) “because I saw people getting overextended in the housing market and missing out on so many other opportunities in life.”

“The only topic anybody talks about is real estate,” he said.

Toronto is especially obsessed but MacBeth says that’s at our peril. If the housing bubble bursts, it could trigger a recession and Canada is overdue for one.

The other likely trigger to a recession, he says, is high interest rates that could cause companies to cut investments and jobs.

Nevertheless, MacBeth says a nine- or 10-per cent house price correction — the drop in the average home sale price in the GTA since February — likely won’t make any difference to the people who inflate the housing bubble. That’s the first time buyers who are at a point in their lives where they need to buy a home and are only interested in how they can swing it.

Macbeth says Canada “managed to skate through the last two or three recessions with a much milder version than other countries like the U.S., because we kept the housing bubble going.”

“Other countries like Spain and Ireland went through a housing bubble bursting at the same time as they had a recession, which makes it very difficult.”

He thinks that will inevitably happen here.

“I just wish it would happen sooner because the damage would be smaller. The longer it goes on, the bigger the damage will be,” he said.

SHARE: