Prices Heat up in February

The weather isn't the only thing that's been hot. Real Estate prices in the GTA jumped by $82K (8%) from January to February! We saw signs of this in mid-January and February picked up even more steam.

All key metrics signal a strengthening of the market. Homes are selling above asking on average, sales to new listings continues to trend closer to buyer's market and days on market fell sharply. Mind you, depending on the market and asset type, it already feels like a buyer's market. Freehold properties priced well (and show well) are moving in a matter of days. Condos are still lagging relative to the market, however they also experienced an uptick (1.8%).

What's causing the optimism in buyers? It's the combination of limited supply and buyers trying to front-run rate cuts and feeling that prices will shoot through the moon once that happens. Unfortunately, there are too many trying to do the same thing which is causing lots of competition (demand) leading to price growth.

Economists and markets are actually predicting fewer rate cuts (2) relative to when the year started (5) with the first cuts pushed to summer at the earliest. While this matters because it impacts sentiment, I do feel it is overblown. Buyers always have 2 options (fixed and variable) and the reality is that fixed rates are so much lower than variable that purchasing power wouldn't be impacted much whether there are 2 cuts or 5 (assuming 0.25 each). The table below outlines the latest interest rate and bond yield forecasts from the Big 6 Banks (changes from previous forecasts in parentheses):

Note that the target rate does not equal the rates banks offer. Banks offer prime (minus a discount which can vary) and prime is currently 7.2%. An interesting chart nonetheless and it signals rates will eventually land somewhere between 3-4%. I'd agree with this but it's anyone's guess if it happens within 2 years.

This goes back to the question of whether or not buyers are right. Based on the information today, you'd have to lean towards yes. Data always changes however, and a plausible scenario is one where home prices run up this spring, causing the Bank of Canada to push back any rate cut announcements leading to higher for longer and putting more pressure on households. Based on the latest mortgage delinquency data, households are starting to feel it. Ontario mortgage delinquencies jumped by 135% in Q4 2023! That's a significant increase and a number trending in the wrong direction. However, it is important to put this figure into perspective. The starting point was historically low and 135% of a very small number (somewhere between 0.08-0.1) is still quite low. Nonetheless, it's a measure to keep your eye on to see if this trend continues.

Canadian households have shown lots of resiliency the past few years and there is still a strong underlying belief in real estate. Is this the year that it finally breaks or will the strong start to the year continue?