Happy New Year! It’s now the season to reflect and plan for the coming year, hopefully you enjoyed the festive season and were able to spend some with loved ones. We at TCS are planning on making 2023 the best year yet.
This special time invites reflection on the past year as much as thoughts on the year to come. Talking to clients for months on end has filled my head with their stories. I am thankful to everyone who reached out and found value in connecting with us.
I want to use this letter to discuss the question of rising interest rates. What sort of pre-construction environment does it create? What should you be looking at and how you should be analyzing opportunities that arise from these market conditions?
Increased interest rates cause recessions, which help curb inflation. When that transpires, central banks cut rates to stimulate the economy, and growth resumes along its normal curve as it has been forecasted to do. It is a process we go through time and time again.
A climate of rising interest rates can be austere and not a lot of fun. However, there are two main benefits for real estate investors in an economic environment like we are in, here at the tail end of 2022. Higher rents for landlords and lessened demand can lead to savvy investors gaining access to powerful investment properties.
In this report, we take a snapshot of what the future of Toronto could look like for real estate investors, and some of the factors that play into making Toronto a world-class city, which necessarily buoys the real estate market. That is the centrepiece of the December 2022 report, as a large number of my conversations with clients, both new and long-term, always come back to the incremental price appreciation that has borne out over the past 20+ years in the city, and the positive pricing forecasts for the next 20 years. It’s all about supply and demand, in the end.
Let’s first review how interest rates affect real estate, because it’s an important point that seems forgotten by the media and general public. The common notion is that as rates go up, prices go down so there is an inverse relationship between rates and values; makes intuitive sense but not necessarily true.
Think of Toronto itself. The reason why values don’t have to go down and can rise continually is that supply and demand are out of step with each other.
Interest rates affect demand. But let’s now look at supply and demand together.
If supply and demand are level, when rates go up, demand goes down. And you would theoretically have more supply than demand.
However, where things get interesting is, in many markets throughout North America, like Toronto, there isn’t enough supply; the two sides of the equation are not even. We do not have enough supply and we have way too much demand. So, even though rates are going up and it’s pushing demand down, it’s not going to go all the way down to where supply is. That is a critical point, but why do we see this in Toronto and only a handful of other places? Because Toronto and places like it present a strong and growing market.
In this, and any future environment with higher rates than today, experience tells us to buy the best assets. When you buy a great property, you are essentially hedging against the market going down by getting into the better neighborhoods, which are better investments and better areas of growth. John and I have been in the game for a long while now, and we’ve seen many market cycles. Our shared portfolio is filled with reminders that inclement circumstances can yield tremendous gains. That is a testament to what TCS delivers to its clients: high-end, coveted investments that hold up and form part of a lucrative wealth generation portfolio.
As an example, in 2010 when prices lowered across North America, the markets did not decrease evenly across the board. The best neighborhoods, the best cities, the best real estate had a small dip but held strong before rebounding quickly when the environment normalized.
It’s a reminder when reading about stats or the housing market, activity and pricing are different things. Headlines for the October 2022 market might say that “sales decreased by 49.1 per cent compared with October 2021” and what they are talking about is number of transactions, as compared with the turbulent pandemic level that rocketed everything to new heights. In reality, prices are down in some areas. But the results are not as severe as they are made out to be. Here is the average pricing data for October 2022:
Detached in the GTA: Decline of 11 per cent year-over-year, now $1,372,438.
Semi-detached: The average price fell 6.2 per cent to $1,079,393.
The average townhouse price in the GTA slipped 3.9 per cent year-over-year to $919,903.
The average condo price increased by 1.8 per cent, to stand at $721,000.
We truly hope that you, dear client, will enjoy reading this report as much as we enjoy writing them. We won’t inundate you with random emails on disparate topics. Rather, we curate our investment offers to respect your time and readership. We only hope you will stay in touch and contact our team when you’re ready to make an investment.
Have a memorable holiday season. All the best to you and your families.