As you might expect with the cost of real estate in the GTA, most of our buyer clients have a mortgage for a portion of the purchase price.  Depending on their situation it can range from as much as 95% of the purchase price to half or less.

Bank data suggest that about one‑fifth of home purchases are all‑cash and consumer surveys and industry estimates place the share of cash‑offer transactions in the broader range of 15–25 %. In the Toronto area, the percentage of purchases made entirely in cash has climbed into the low 20s and we’d estimate for the GTA that roughly one in five buyers pay for a property with no mortgage.

While lenders in Canada have done very well loaning money to people to buy real estate, it doesn’t mean they don’t follow some rules to make sure the property being purchased is worth the amount the buyer is asking to borrow.

Lenders use appraisers for this purpose, individuals who are trained and accredited in the ability to assess the value of real estate.  While we wouldn’t go so far as to see appraisers are the natural enemies of real estate agents, it can be a difficult relationship.  Real estate agents work in real time on the ground with their clients and have a current and up to date understanding of the market and the value of homes.  Appraisers work from closed deals only and in a fast moving market (with prices either going up or down over the course of weeks), the appraised value they come up with can make the deal price seem wrong.

In addition, while appraisals are often described in scientific terms as if they are concrete, absolute statements of fact, they are more of an art than a science.  Three different appraisers will provide three different values for a given property, sometimes with significantly different valuations.  When was the last time you saw a scientific experiment or theory accepted as valid when the results keep changing?

When an appraisal comes in at higher than the purchase price, it generally doesn’t cause problems.  The buyer is thrilled at the idea that they actually got a bargain on the home, the lender has no issues with proceeding with the mortgage at the agreed upon ratios and everything moves forward.

When the opposite happens, then things can get messy.  Let’s talk about what happens when someone buys a home and the appraisal from the lender comes in at less than what they agreed to pay.

First, the basics.

A buyer submits an offer for a property at a price they are willing to pay. By definition, this is now market value, as the home went up for sale (on “the market”) and a buyer offered a purchase price that the seller accepted. Boom, market value established.

If the buyer has all the money for the property, then that’s it. As discussed though, most buyers have a mortgage of some amount, though, and this is where things get a bit more complicated.

A lender (be it a bank, credit union, private lender or your Aunt Sally) makes the decision to lend based on how much you make, how much you owe and your past record of borrowing responsibility. When we work with clients, we guide them through this process before we get too far along in the purchase journey. By providing job documentation, bank information and submitting to a credit history review, our clients are pre‑approved for a certain amount at a certain interest rate. A pre‑approval can be looked at as the lender saying, “OK, I’m comfortable loaning you this much money based on your situation.”

When a prospective buyer finds the home that fits their needs and budget, we negotiate the best price and terms possible and buy the home. If we can, we write the offer conditional upon financing approval. In a strong seller’s market, it can be very challenging to buy a home with any conditions, but in any market the logic remains the same.  We want financing approval because the buyer needs to turn their pre‑approval in general terms into approval of a specific property.

Here’s an example.

Our client buys a home listed at $729,900 for $800,000 in multiple offers. While we would have preferred to have a financing condition in place, with other offers in play that had no conditions, our client made the decision to remove the financing condition. They had a pre‑approval up to $900K in place and had a down payment of $160,000 ready. This meant they had 20% of the purchase price and wouldn’t need to pay CMHC fees.

Though our client is willing to pay $800K for the property and has been pre‑approved for up to $900K in a general sense (based on income, debt levels and credit history), the lender must be comfortable that the property is worth that $800K. In essence, the lender needs to be confident that when it comes time to sell the property and recover their loaned amount (the outstanding mortgage due), they will be able to get their full amount back.

The lender sends in the appraiser and in a few days comes back with some bad news: the property that our client has bought firm for $800K is appraised at $750K, a shortfall of $50K.

Our client expected the purchase would look like this:

• Purchase price: $800K
• Mortgage: $640K (80% of $800K)
• Down payment: $160K

After the appraisal comes in lower than the purchase price, the lender says, in effect, “We were willing to loan you 80% of the purchase price, with you providing a 20% down payment. We are still willing to loan you 80% of the appraised value, but you need to come up with the shortfall.”

The purchase now looks like this:

• Purchase price: $800K
• Mortgage: $600K (80% of $750K)
• Down payment: $200K

As a result of the appraisal value, our client needs to find an extra $40K in order to close on the deal.

They may be able to find another lender to offer that $40K at a higher interest rate (as second mortgages are second in line after the primary lender for repayment and are therefore riskier) but it will depend on what the changed interest rate does to their debt‑servicing ratio. If they were already at their limit, then finding another lender may be difficult or impossible.

When a buyer has made a firm purchase of a property and runs into financing problems, it is possible that the deal won’t close. If the buyer can’t get the money to close on the closing date, then the seller won’t hand over the keys. To be clear, the buyer has a legal obligation to close on the deal as per the agreed‑upon terms. A legal obligation isn’t the same as actually having the money, though.

The deposit that was provided at or shortly after the purchase date (when the price was agreed upon and the papers signed) is held by the seller’s real estate brokerage. If the buyer cannot close on the deal, then the seller has the option of showing damages and keeping some or all of the deposit that the buyer provided. Determining damages can be complex and lawyers will be involved on both sides to determine if and how much of the deposit can be kept by the seller as a result of the buyer failing to close as they are legally obligated to do.

That sounds…messy.

It’s a messy situation and one that should be avoided at all costs. It truly is something neither side wants, as both the buyer and seller wanted to do the transaction and agreed upon terms that one side ended up not being able to complete.

Here’s how we work for our clients to avoid a situation like this.

When we work with buyers, we discuss the repercussions of a lower appraisal, changes in interest rates and other factors. If we are in a situation where we cannot have a financing condition, we make sure we have done our work beforehand to know the consequences of a lower appraisal and that the buyers have the ability to make up the shortfall if need be. We leverage this information with the seller and their agent, letting them know that our clients are solid purchasers who can close even if the appraisal value is lower. We’ve used this to get a seller to choose our clients over a higher offer price because the seller was more confident we would close without an issue.

On the selling side, we ask questions of the buyer and their agent to get at their situation with regard to financing. We want to know their down payment amount available, income and type of work, and their pre‑approval status. This is true regardless of whether the buyer includes a financing condition. While our seller may have recourse if the deal doesn’t close, our goal is to make sure that from offer to close we have a smooth process.

If you or someone you care about is considering buying or selling, make sure you work with a Realtor that understands how to make sure the deal actually closes. From the day of negotiations to the day the keys are exchanged, we’ll help you avoid surprises.  If that sounds appealing, get in touch with us!

One of the guiding principles in real estate is the idea of highest and best use.  This refers to the most profitable, legally permissible, physically possible, and financially feasible use of a property, which results in the highest value.

If you’ve ever noticed a low-rise building being torn down and replaced by a high-rise building, it’s following this principle.  At one point in time, a smaller building of a couple of stories was the highest and best use of that property, but over time, things changed.  In many cases, increasing densification and demand for a certain type of real estate means that the highest and best use is no longer the same as what it was in previous years.  Perhaps there is now more demand for housing and a condo building is being built, or perhaps the street the property fronts upon has grown increasingly busier, and a retail plaza is a better use than residential houses.

While it is sometimes possible to effect a change in the highest and best use of a property without needing more property, it often requires land assembly in order to make the change.  As the name states, land assembly is when someone – typically a developer – buys up a number of plots of land in a row in order to build something.

Let’s talk about what causes this to happen, how the numbers need to work, and when land assembly really works in your favour.

It’s officially a plan.

While it may not always feel like it, most municipalities have a plan for growth and development, including land use as well as infrastructure needs.  If you search for “<YOUR TOWN NAME> Official Plan” online, you’ll likely find a section of your municipality’s website that sets out a framework for managing physical change and land-use decisions over the next 20 to 30 years.

These aren’t simply theoretical documents that were developed and then put off to the side.  In fact, if you ever wonder why your town is growing in a particular way, odds are pretty good that the official plan dictated it.  They’re used by city planners, officials and staff as the framework for how it will grow and change.

An Official Plan covers off things like:

• Land Use Designations: Defines areas for residential, commercial, industrial, agricultural, recreational, and other land uses.
• Growth Management: Guides how and where the community will expand, including policies for urban boundaries, intensification, and density targets.
• Infrastructure Planning: Addresses transportation networks, water supply, wastewater management, utilities, and other essential services.
• Environmental Protection: Incorporates policies to preserve natural heritage features, water bodies, forests, and environmentally sensitive areas.
• Housing Policies: Provides strategies for affordable housing, mixed-use development, and diverse housing types to meet community needs.
• Cultural and Heritage Conservation: Protects areas of historical, cultural, or architectural significance.
• Public Consultation and Participation: Ensures the community has input through public meetings, workshops, and other engagement tools.
• Implementation and Monitoring: Outlines how policies will be enforced, reviewed, and updated over time.

The Official Plan – and changes to it – have a big impact on when land assembly makes sense.  As an area changes over time, it can become apparent that the historic use for a given property may no longer be the best option.  What is less clear, is when the Official Plan permits a change to be made.

Consider a plot of farm land, zoned agricultural, that is slowly encroached upon by a growing town.  For a number of years, running a farm on that land was the highest and best use.  As developers build subdivisions nearby and demand continues to increase, housing may become the highest and best use for that farm land.  Despite the economic rationale, zoning and other aspects dictate whether a change can take place.  Unless there is support for changing the zoning from agricultural to residential, no developer is buying up that farm land for a new subdivision.

This sort of thing also takes place at smaller levels in existing residential properties within towns.  The Official Plan is often designed with change in mind and the zoning for properties adjacent to a major road are typically more flexible than a property on a lower traffic street.  As cities grow, it is not uncommon to see amendments made to the Official Plan that suddenly change the possibilities for certain properties.  Whether it is a result of changes to the Official Plan or just changes to the town itself, when a new opportunity for the best and highest use is possible, land assembly can start being considered.

An important part of that consideration is what is required under the existing zoning.  Many municipalities put in requirements for minimum lot frontages or minimum lot areas in order for a new use to be possible.  These requirements mean that a property that is technically zoned for the new, now desirable use, may not be permitted to move forward due to the size of the lot.  This is done in order to encourage land assembly if the municipality prefers to see a smaller number of larger developments, rather than a lot of small, one off developments.

The math still needs to math.

At the heart of any land assembly are the finances.  Unlike a change to the highest and best use when it is just taking place with an existing property, if there is land assembly involved, it means buying additional plots of land.

The pro forma calculations for a development are complex and there are always uncertainties around specific numbers.  Depending on the type of development, the length of time involved can span years and real estate markets can change considerably during that time.  As a result, when a developer analyzes the financial feasibility of a project, they need to build in a safety buffer when it comes to the expected eventual sale price.

When some costs are incurred later and cannot be set exactly – and when revenue is only fully realized at the end of the project – the cost of the land being acquired to begin the project is often where the greatest clarity can be found.  As a result, this is also where a project can be cancelled before even starting if the numbers don’t work.

While developers need to buy the properties in a land assembly at a price that works for the projected eventual sale of the new development, the owners of those pieces of land also need to be offered prices that make it worth selling.  At a bare minimum, a developer needs to be able to offer more than the lot is worth at its current use, or a sale won’t take place.  If there is a negative bargaining zone, where the owner could sell the land at its current use for more than what a developer is willing to pay, the property will remain in the current use.  It can take some time before a marginally feasible development becomes lucrative enough for a developer to pay the necessary price to assemble the land.

In other cases, the numbers work very clearly in favour of a development being the new best and highest use.  In such cases, a developer can offer substantially more to the owners of the required land than anyone intending to keep the use the same.  We’ve worked with a few clients that have been the beneficiaries of this sort of situation, where they’ve been able to sell a residential property for considerably more than it would be worth to someone intending to keep the home there.  The price offered is dependent on the finances (and likely profits) of the future development, but it can range from hundreds of thousands to even millions more than they’d otherwise receive for the property.

Being last is best.

In any land assembly, the last property that is necessary is often the most expensive piece.  If a developer has all but one piece of land for a desired project, the remaining land owner has a lot of leverage to push on the purchase price.  While the numbers still need to work for the feasibility of the project, the final piece in the puzzle is the most valuable.

Consider a development that requires five plots of land for the optimal design and profitability of the project.  If the first four pieces of land are purchased for $1M each, but the fifth piece initially refuses the offer, the likelihood of a purchase price over $1M is strong.  While all developers will seek to minimize the cost of land assembly, the math is what dictates their maximum price.  In the above example, if the project was worth doing if the land assembly cost less than $8M, that final piece of land has a theoretical value of $4M to the developer.  They naturally won’t want to pay that price, but they could in theory pay up that price.  It is for this reason that developers often try to negotiate a group purchase from all of the required land owners.  While it may seem like this would result in a premium being paid by the developer, as they weren’t able to purchase some properties at a bargain price, it avoids the situation where the final piece of land is substantially more expensive than all the others.

While land assembly isn’t nearly as common as the purchase and sale of properties for their continued same use, it does happen in growing communities.  If you’re interested in investing in properties with a significant eventual upside, or have land that you think might be suitable for land assembly, then get in touch with us to discuss how to proceed!

As we continue to face a housing affordability struggle in the GTA and beyond, it’s important to look at alternative models of ownership that can help people find a home of their own.

One model that is pretty misunderstood are land lease properties.  As the name indicates, it is where you own a home but you’re just leasing (renting) the land that it sits upon.  It’s a misunderstood option and we thought we’d clear up some of the confusion and talk about how it works.

We have helped a number of clients buy and sell such properties and while it is a bit different from the “traditional” model of home ownership, it is definitely a great option to consider if current home prices are out of your reach.

Without further ado, let’s get into it!

So, it’s a trailer park?

While the earliest examples of land lease developments were manufactured mobile homes (RVs, trailers, etc.), that has changed over time.  Many new leased land communities are being built using modular, manufactured, and traditional built homes.  Whether built on slab or with a limited foundation (think crawl space rather than basement), they are not homes on wheels you can move easily.

A fuller description of land lease properties would be something like “house purchase but leasing of land” as we’re definitely talking about a physical house you buy and own.

The key difference is that land lease home ownership allows someone to own a home without owning the land that it sits upon.  This makes it more affordable to purchase than traditional freehold homes and it is growing in popularity as it lets you build equity while freeing up money for other priorities.

It’s not too dissimilar from owning a condo townhouse in terms of how it works, with the important caveat that in a condo townhouse you own the land, or at least the rights associated with the land.  Despite that distinction, anyone who has lived in a condo townhouse is familiar with the idea of having their own home but having a communal responsibility (and shared costs) for other parts of the complex.

Land lease properties have long been popular for those seeking an affordable retirement but in recent years, it’s also become popular with young families looking to buy their first home.  While not particularly popular in Canada, it is well established in the US and Europe.

If I don’t own the land, who does?

In Canada, there are three main types of land lease properties: commercial developers, First Nations, and institutional owners.  Let’s review each type.

Commercial Developments

There are developers who build planned communities on land parcels and operate them on an ongoing basis. It’s often the model for retirement communities, but it can also be the model for a condominium-type setup in urban areas.  Within Canada, Parkbridge is considered the leading operator, developer, and owner of land lease communities.  At last count, they had more than 55 residential communities and 35 RV resort communities across the country.

First Nations

Another common source of leased land property are First Nation bands that are leasing land located on reserves set aside under the Indian Act of Canada.  You may have encountered friends who have bought leased land cottages where the land is owned by a First Nation band.  Just like with the retirement communities that are the common commercial development model, it’s not much different than owning any other cottage, except for the price.

Institutions

Finally, there are some institutional owners who sell land lease properties, though it is more uncommon.  There are some municipalities, universities, and other public institutions who have designated some of their property for a long-term land lease either because it’s endowed or has some long-term value.  If you’re a Toronto resident, you’re likely familiar with the Toronto Islands, which are an example of institutional owned land leases.  There are 262 residential properties on Ward’s Island and Algonquin Island, overseen by the Toronto Islands Residential Community Trust.

What’s it cost to rent this land?

It’s impossible to give a specific average cost for a monthly land lease fee, as the actual monthly cost to lease land depends on a number of factors.

First and foremost, the local real estate market dictates the value of the land.  While you may not be buying the land, commercial developers did – and the cost they charge for lease is based on what market rates allow.  In the case of First Nations bands or institutional owners, the land has likely been owned for a long time, but following the principal of “highest, best use”, rent is charged that makes sense given the market conditions.

Using the same logic, the size of the lot you’re renting heavily influences the rent being charged, as if you weren’t renting it, they could be doing something else with that plot.  Other considerations that impact the rental rate are amenities associated with the development, upcoming investments to be made within the development and services provided.

For the most common type of land leases, commercially owned communities, the monthly rent includes lease of the site and use of the property, as well as professional community management. Often this includes such things as community garbage and recycling, tree maintenance, fire hydrant inspections, sewer and pond maintenance, drainage, underground infrastructure repairs, and municipal property tax for the common areas.  While the list of what is covered under a land lease varies from community to community, it often also includes landscaping and maintenance of common greenspaces, parks, roads, walkways, community facilities, hall spaces, and related equipment.

It isn’t too much of a stretch to say that whatever you’d consider the responsibility of the municipality in a typical freehold home where you own the land, is instead the responsibility of the developer.  Whether this costs are bundled into an overall land lease fee, or broken out separately (as is often the case due to variability each year), a monthly fee covers off these costs.

As a homeowner of a land lease property, you’d be responsible for the regular maintenance and upkeep of the home and yard as well as your own utilities, including natural gas/propane, water, electricity, cable, internet and telephone.  The monthly bill that you pay to the operator of the land lease community will likely list a land lease fee as well as taxes, exterior maintenance, water and sewer.

Just like with maintenance fees for a condo unit, well managed developments keep the monthly costs low, while developments facing issues often see increasing costs billed to land lease tenants.  These costs tend to go up over time, which leads us to the next topic.

How long is this lease?

When you don’t own the land that your home is sitting upon, the length of your lease obviously becomes very important.  While the Residential Tenancies Act applies to land lease communities, there are significant differences between the rental of a house or condo unit (where you are always only renting the space, not the land) and a land lease.

The length of the term of a land lease will vary by province, due to provincial legislation and other considerations, so leases are anywhere from 1 to 99 years.  While you could in theory sign a very short-term lease of land (i.e. just a couple of years), this is obviously only practical if the home you put on the land is a mobile home that can be moved easily.

The length of the lease that is able to be signed by a new owner is a very impactful aspect of the value and therefore the sale price of a land lease property.  This is true both from the perspective of being certain how long you can live in the home on that piece of land, as well as in regards to the financing of the property.

Can you still get a mortgage on a house on leased land?

The short answer is yes, you can get a mortgage on leased land properties.

The longer answer is that there are additional considerations that apply, so let’s review.

In areas where they’re common, you’ll likely find local lending institutions have developed packages to address the specific particulars of a land lease.   The CMHC will insure most land lease mortgages, but there are certain caveats.

We mentioned the importance of the lease term for the value of a leased land home, but it also directly impacts getting a mortgage or refinancing such a property.

While underwriting guidelines vary, you should assume that the lender will be checking to make sure that the remaining term of the lease exceeds the amortization period of the Mortgage by a minimum of five years.   For example, if you are considering buying a land lease property where the standard lease term in the community is 21 years, don’t expect to be able to get a mortgage with a 25 year amortization.  Instead, you’ll likely be offered a 15 year amortization to make sure there is a buffer between when your mortgage ends and your lease ends.

From a debt servicing perspective, buying a land lease home may also come with higher monthly costs as described in the earlier review of land lease costs.  While the home itself is cheaper than the freehold equivalent, you’ll have additional costs (land lease, maintenance, etc.) that will factor into the total debt servicing ratio.  This is somewhat mitigated by the lower property taxes as you don’t own the land, but it depends on the lender and how they calculate debt service ratios.

Please note that while a mortgage may be possible most lenders ask for a down payment of between 25% to 30% on the home.  While a lower purchase price makes this easier for a potential home buyer, it is still a far cry away from putting down 10% to 20% on a more typical freehold home purchase.

So, how much cheaper are these type of properties?

While it can be difficult to assign a specific discount to lease hold homes compared to freehold homes where you are buying the land as well, the price for a land lease home can be as much as 25 to 30 per cent lower than freehold.

In addition, the Ontario Land Transfer Tax applies when land, or an interest in it, is purchased, but it does not apply to leases whose total terms do not exceed 50 years.  While Toronto is the only municipality with an additional municipal land transfer tax, the provincial land transfer tax is still pretty hefty.  If you were considering a $500,000 freehold home with land versus a $500,000 land lease property, you’d save $6,475 in land transfer taxes if you bought the land lease option.

It is worth mentioning that a lower purchase price on land lease properties is fundamentally because that while buyers enjoy the equity of owning the house, and benefit from any increase in value of that home, they will not share in increased land values.  In short, you can buy at a discounted price from the freehold market, but you should also expect to sell at an equivalent discount in the market when you sell.

Speaking of selling…how do these homes do in terms of appreciation?

It makes sense to us that in a sharply increasing market, where prices are rising quickly, land lease properties may do better than the market as a whole as they remain a much more affordable option.  Conversely, if the market is dropping and we’re seeing lower average sale prices compared to a few years ago, buyers who previously would have only been able to afford a leased land house may be able to afford a home with land.  In that situation, we’d predict that the lease land market would do worse than the market as a whole.

If you’re considering buying a land lease property, work with agents who can do the research to tell you how homes in that development have done in the past in terms of appreciation (or depreciation).  It isn’t an easy thing to do, but relying on past general market changes and applying it to a land lease property is quite risky.

We hope you found this review of land lease properties useful.  Given the ongoing housing affordability crisis we’re facing, it is a model worth considering.  If you’re thinking about buying (or hoping to do so) and want to discuss your specific situation, we’d love to see if we can help you move forward.  Get in touch with us to book a time to chat!

Once upon a time, real estate was considered a stable but not particularly lucrative investment.  In these quaint times, people bought homes to live in, with the hope that they would appreciate somewhat over time.

Starting in the late 1990’s, real estate in Toronto and the GTA began an upward climb that continued, more or less uninterrupted, until 2022.  It was in that year that we saw the cumulative effect of many years of price appreciation and rising interest rates finally put a stop to the rapid price growth to which we’d grown accustomed.

Take a look at the chart below to see our average price in the GTA since 1994.

Back in July, 2016, we did a review of how long it takes to recover the transaction costs of buying and selling a property in the GTA.

We did this analysis because we were curious if a piece of commonly held wisdom – that it takes about five years to recover the costs of buying and selling real estate – was still accurate.  Our analysis found that depending on the housing type, it was taking just between about five months to 13 months to pay for the transaction costs of buying and selling real estate.   Clearly, what was once the case was no longer true!

Given that review was almost nine years ago, we thought it would be nice to update it so we could see how long it takes these days.  We almost immediately realized that we can’t do an updated version of the same analysis now.  Let’s go over why we can’t do as detailed an analysis in these current market conditions and then we’ll review what it actually costs to buy and sell real estate now.

We’ll start with how long it takes to recover transaction costs these days.

Let’s see, how does never sound?

Our analysis back in 2016 took place in a time where the average annual price increase for real estate ranged from about 7% per year for condo apartments up to almost 20% per year for detached homes.  With some reasonable assumptions about costs and projecting prices continuing to increase at the same level in the next year, we could calculate how long it would take to fully recover the costs of buying and selling real estate.

If we tried that now for each of the four major housing types, we’d have a range of year over year price changes going from -1.6% for condo apartments to 2.1% for detached homes.  If we segmented it further by Toronto vs the 905, we’d have stats like semi-detached homes dropping in value by 3.7% in Toronto, yet the same type of home rising by 2% in the 905 area.

With so much of a range between housing types and parts of the market, the average becomes far less reliable as a proxy for your home’s past performance and any predicted value.

For semi-detached homes and condo apartments, the negative price appreciation (or loss in value to be clear) means that if you wanted to calculate how long it would take to recover the costs of buying and selling, the answer would be never.  After all, you need your home to increase in value in order to cover the real estate commissions, land transfer taxes, bank fees and legal fees.  If it is going down in value, then you’ll never recover those costs.

Gimme the big picture review.

While it’s clear that the market differences in housing types and location mean the overall average isn’t as applicable as it once was, we can still do some basic analysis.

When we take the likely-not-applicable-to-your-home average price increase in 2024 and forecast it forward, it looks like this.

The above includes the Toronto Municipal Land Transfer Tax, so if you don’t buy in Toronto, it won’t be applicable.  We put in a 2.5% realtor commission on both the buy and the sell side, but if you think it would be lower for your case, then the above is a bit overstated.

The analysis tells us that, using the latest average prices and recent market history, it now takes about six years to recover the transaction costs.  Put another way, if you buy a place and sell it six years later, you’d have the same amount of money as when you bought it.  If you’re paying CMHC mortgage insurance premiums or breaking a mortgage term with a lender, then those costs would mean you’re actually losing a significant amount of money.

So, how much of my value is being eaten up by fees?

It is very expensive to buy and sell real estate and we often find clients who are unhappily surprised by how much it actually costs when you add in all the expenses, fees and taxes.

Let’s go through an example of what it costs, using a $1M home in Toronto.  That’s pretty close to the average price in the city as of January, 2025.

First off, let’s look at additional costs for when you buy.

• On a $1M purchase price, the Ontario Land Transfer Tax payable by the buyer is $16,475. That’s about 1.7% on top of your purchase price.
• In Toronto, you have the additional Municipal Land Transfer tax, which is the same as the Ontario LTT, namely $16,475. So, add another 1.7% in taxes onto your purchase.
• Bank and legal fees will likely be around $2,500 for most typical purchases. This does change somewhat based on the purchase price, but if you budget between a quarter percent to half a percent of your purchase price, you’d likely be in the right area.  Note that if you’re using a Class B or C lender, they will likely charge additional fees far in excess of what a major bank would likely charge.  It is not uncommon to see 1% fees on the mortgage amount!
• If you’re putting down less than 20% of the purchase price, you will also have to pay CMHC Mortgage Insurance fees. These range from 2.8% to 4% of your total mortgage cost, plus HST.  While the HST on the CHMC fees has to be paid up front, you can typically add the CMHC fees themselves onto your mortgage amount, so you get to pay interest on the fee you were charged!

Put it all together and you’re likely to see between 3.5% to 4% in taxes and fees on top of your purchase price.  If you use an alternate lender for your mortgage, add 1% onto to that and if you buy with less than 20% down, you’re looking at somewhere in the 3% to 4% range in additional costs from CHMC.

When your transaction costs are between 3.5% to 4% for a typical purchase and double that if you have a low down payment or don’t qualify with an A lender, you can see how expensive it can be to buy!

Now let’s turn to the sell side of the equation.  For our purposes here, we’re going to say you’re selling for the same $1M you paid when you purchased the home.

• Real estate commissions in Ontario are not set and can vary considerably. There are many different approaches that you can take, including private deals with no commissions, flat fee brokerages and so forth.  In addition, different parts of the GTA have slightly different typical commissions being charged by listing agents and offered to buying agents.  In our experience, real estate commissions of between 4.5% to 5% of the sale price are common.  HST is due on top of that, which adds another 0.65% to these costs.  For our $1M home example, it would cost about $60,000, including HST, in real estate commissions.
• Bank and legal fees are similar on the sell side as they are on the buy side, so for a typical sale, with one mortgage to discharge, somewhere around the $2,500 mark is likely a reasonable estimate. That works out to the same quarter of a percentage of the value of the home for the sale as it did on the purchase side.  Note that if you have a mortgage and you are breaking that mortgage before the end of the term (and not porting – or transferring – the mortgage to a new purchase) you will likely incur breakage fees from the lender.  These can be as little as three month’s interest or they can be a significantly more expensive amount based on what is called the Interest Rate Differential calculation.  Make sure you speak with your lender well before you make a transaction to understand the costs.

When you add the real estate fees and the bank and legal fees, along with the HST on both, you’re looking at costs that equal around 5% to 5.6% of the sale price.

If we combine the costs from buying and selling, most people end up paying transaction fees that equal 8.5% to 9% of the value of the home.  While some of these costs vary depending on the approach taken – and the professionals involved – make no mistake, it is expensive to transact in real estate in Ontario!

If you’re considering buying or selling real estate, then we’d love a chance to show you why our clients choose to hire us to help them through the process.  We believe that hiring the right agent means you pay less when you buy and get more when you sell.  This goes a long way to helping alleviate the transaction costs.  If that sounds appealing, get in touch with us to chat further.

For many homebuyers, the first step on getting onto the property ladder is purchasing a condo apartment.  While they aren’t as plentiful in smaller towns or cities, when they do exist they are almost always the cheapest option if you’re considering buying a home of your own.

For much of 2024, we’ve seen very elevated levels of condo apartments for sale.  As of December 20, 2024, there are 9,671 condo units for sale within the Greater Toronto Area.  If you’re wondering if that’s an unusually high level of options for condo buyers, the answer is a definitive yes.  We’ve currently got almost twice as many condo apartments for sale now compared to a couple of years ago.

With such high levels of supply and relatively few buyers on the demand side of the equation, there are many opportunities for getting a great deal on a condo apartment these days.  If you’re currently renting and are wondering if buying might make sense, then we’d say the answer is a definitive yes.  Let’s go through the math and explain why we think now is the time to get on to the property ladder!

What’s it cost?

While your specific situation will be different than the average, we gathered a bunch of data in order to be able to analyze the differences between renting and buying on an overall level.  We’ll make our assumptions clear as we go.

When we pull the data for the average cost to rent or buy a one-bedroom or two-bedroom condo unit in Toronto and beyond, here’s what we see.

The above chart uses data for the average rent and purchase price for Q3 (July to September) 2024.  We had to exclude Dufferin from this analysis as there just isn’t enough data to be reliable.

With an average rent in the GTA of about $2,500 for a one bedroom unit, or just over $3,200 for a two bedroom unit, it isn’t cheap to rent a condo apartment these days.  On the buy side, a one bedroom goes for about $578,000 in the GTA and a two bedroom costs about $200,000 more at around $782,000.

Durham is the cheapest place in the GTA to supersize your condo, as going from a one bedroom to a two bedroom condo adds just $77,000 on average.  Compare that against Halton, where buying a place with a second bedroom adds a whopping $250,000 on average.

OK, but what is the cost to carry a condo if you buy at those prices?

In order to do an apples to apples comparison, we ran the numbers to see how much it cost in each area to own that one or two bedroom condo unit.  Before we get to the results, let’s clearly state our assumptions:

• We assumed a 20% down payment, so there are no CMHC insurance costs, and we calculated the mortgage cost using a 4.99% interest rate with a 25 year amortization period.
• We put maintenance fees at $550 per month for the one bedroom units, based on the idea that such units are typically in the 500 to 600 sf range, and maintenance fees of close to $1 per sf are common these days. For the two bedroom unit, we upped that to $750 per month, based on the idea that they will be a couple of hundred square feet larger than the one bedroom units.
• We assumed a 0.07% mill rate for the property tax as that is a reasonable rate across the various municipalities in the GTA. We used the actual average price as the assessed value but given MPAC is always a bit behind (and currently very, very far behind), our estimates for property tax will be on the high end.  Better to assume it will cost more than too little!

Obviously, any changes to the above assumptions will impact the end result, but we wanted to use some base calculations to be able to compare across the different areas and for the one and two bedroom condo options.  Here are the results.

Let’s see how those monthly carrying costs compare against the different markets and for one and two bedroom condo units.

We can see that it costs between about $750 to $1,150 more per month to own a one bedroom condo compared to renting it.  Peel has the lowest percentage difference at just 32% more per month and Toronto and York are tied at 45% more per month to own compared than renting.

For two bedroom condo units, the range goes from about $1,050 to over $2,000 per month.  In percentage terms, Peel once again has the lowest difference, where it costs just 35% more to carry a two bedroom condo than it does to rent one, and Halton is the worst area, where it costs 68% more to own a two bed unit than it does to rent one.

While this tells us which markets get the best results if you buy versus rent, it also tells us that if you’re an investor, Peel is your best option.  If the difference between what you can charge for rent and what you have to pay to own is the lowest, it means you don’t have too much of a spread to cover.  An investor who put down more than 20% would quickly approach a cash flow neutral or positive property if they bought in Peel.

It still seems like renting is cheaper.

There is one part of the rent versus buy calculation that is often overlooked, namely the percentage of the mortgage payment that is principal repayment.  This is important because while the monthly mortgage payment is money you as an owner need to have available, a portion of that payment is effectively a forced savings plan.

At the 4.99% mortgage rate and 25 year amortization we used for our mortgage payment calculation, the payment is about 28% principal repayment and about 72% interest payment.  That’s from the first payment and the way mortgages work means that every subsequent payment is slightly higher principal repayment and slightly lower interest payment.  For each of the markets we can calculate the effective monthly mortgage cost and get a revised effective monthly cost.  This isn’t what you’d pay each month, but it is the number if you recognize that more than a quarter of your mortgage payment is building your equity in the unit.

Here’s how that math works out, when we calculate the principal repayment and what the effective mortgage payment is once you remove that forced savings aspect.

If we take that effective monthly mortgage payment and add in our other costs, we get an effective monthly cost to own, which we can compare against the actual rent.  Doing so means that we see the difference between what it costs to rent versus own shrink tremendously.

For one bedroom condo units, the effective difference between renting and owning is as little as $97 a month in Peel, up to $345 per month in York.

With two bedroom units, Peel is just $222 more per month (effectively) to own a unit and Halton is the worst option, at $944 more per month.

Anything else to consider?

The final part of the buy versus rent calculation is appreciation.  While the condo market has been very tumultuous over the last couple of years, the historic average for condo units appreciation has been about 6.29% per year.  That’s a significant equity gain that you don’t receive if you are renting, but at the same time, you haven’t invested the 20% down that we used in our calculations, and that money could be appreciating if you invested it.

We consider this part of the conversation to be out of wheelhouse, as forecasting appreciation in a given market is very challenging, and we can’t speak to likely returns on invested funds in the stock market at all!  In a very general sense, we’ll just say that if you own a condo unit, when you eventually sell it, you will either benefit from market appreciation, or lose out on market depreciation.  Historically, we’ve seen real estate appreciate and we believe that will continue, but we’ll let you decide on what you think will happen with this aspect.

Put it all together and we see the buy versus rent question as having a clear answer.

The high rent being charged in the GTA, when contrasted against relatively low sale prices for one and two bedroom condo units, means that the difference between the costs for owning and renting have narrowed considerably.  When you take into account the principal repayment portion of your mortgage payment, the difference can be as little as about $100 per month in certain markets.  Even at higher differences between the effective carrying costs when you own versus renting, the gap is nowhere near as extreme as many people think.

If you have a significant down payment available, you like the idea of building equity in your own home versus your landlord’s income property and you think real estate will appreciate over time, then now is a great time to buy a condo.  If that sounds like you, then get in touch with us so we can run the numbers for your specific situation!

Earlier this month, the Bank of Canada made its sixth (out of eight for the year) interest rate announcement and for the third time this year, they lowered the overnight rate.

For most people, the reason why mortgage rates change is a complete mystery. While the idea that a person with a good job and good credit can get a good mortgage rate is clear, the changes in mortgage rates can seem arbitrary.

Will mortgage rates rise or fall this year? Should I lock in now or wait until later? Is fixed a good idea or should I go with variable?

It is a confusing situation on the surface but the good news is that there are actually only two factors that influence mortgage rates.   Let’s look at what they are and how they impact the two types of mortgages and see which makes sense for you.

Let’s call it the cost of risk.

There are just two factors that impact mortgage rates, but they are a little bit complicated.

The factors are:

1. The cost of funds (today as well as later); and
2. The lending environment.

At its most basic, lenders are in business to make a profit. If there was no competition, lenders could charge what they want for mortgages. Fortunately for anyone looking to get a mortgage, a competitive marketplace keeps rates low in good times and reasonable in bad times.

Let’s take a look at the two main types of mortgages – fixed and variable – and how the cost of funds and lending environment impacts rates.

Fixed Rate Mortgages

This type of mortgage, with a single interest rate set for the term of the mortgage, is the most popular in Canada.  The CMHC Mortgage Consumer Survey 2024 shows that 69% of consumers in Canada in 2023 chose fixed rate mortgages.

In order to make a profit, lenders need to charge enough so that they make more from you than their cost for borrowing that money. While we may perceive lenders as simply having the money and loaning it to us, lenders are themselves typically borrowing the funds. In today’s market, that is normally from selling what are known as mortgage backed securities.

Purchasers of such mortgage backed securities would traditionally buy long term government or investment grade corporate bonds, so the rate to be charged on fixed rate mortgages is dictated by rates that are paid on such bonds. If bond rates rise, fixed mortgage rates rise as mortgage backed securities need to remain competitive with these bonds.

There is an entire industry following the bond market that focuses on predicting changes in the bond rate and it is from these predictions that 1, 2, 3, 4, 5, 7 and 10 year bond rates are set, which in turn dictate the basic mortgage rates for those terms.

A lender who deals in fixed mortgage rates therefore knows their cost of funds today and the anticipated costs of funds later. They take that cost of funds and charge a premium (also called a yield or spread) on top to come up with their fixed mortgage rates. This premium is where we see the lending environment impacting the mortgage rates that are offered.

For fixed mortgages, the lending environment that is relevant is the activity in the bond market, particularly the investment grade corporate bonds.  Broad economic and environmental factors influence our perception of risk and the return we need in order to justify that risk.

In simple language, if an investor is deciding between investment grade corporate bonds and mortgage backed securities, they look at which has the most risk.  While in general both are supposed to be equal in risk, the reality is that there are fluctuations in perceived risk.  If investment grade corporate bonds are perceived as safer than mortgage backed securities, lenders need to offer a bit higher a rate in order to get investors to buy.  When that happens, lenders raise the mortgage rates they offer consumers.

If the reverse is true and investment grade corporate bonds are perceived as riskier than mortgage backed securities, then lenders can offer a comparable rate and have investors buy in.  In such cases, lenders keep the mortgage rates the same or perhaps even lower the rates a little.

It is this combination of perceived risk in the lending environment and the cost of funds (both now as well as the anticipated cost later) that influence fixed mortgage rates.  Let’s turn now to variable rate mortgages, which have different influences within the same factors.

Variable Rate Mortgages

This type of mortgage, with an interest rate that changes over the term of the mortgage, is the other popular mortgage type in Canada.  The CMHC Mortgage Consumer Survey 2024 shows that just 23% of consumers in Canada in 2023 chose variable rate mortgages.  (The remaining 8% are more complicated, mixed versions.)

As the name “variable rate mortgage” implies, the rate you are paying changes over time. In this type of mortgage, the lender does not need to worry about the anticipated cost of funds later as if their costs go up, so does your rate. How then, do you as a consumer, understand what causes the variable rate to change?

All variable rate mortgages use what is called the bank prime rate as a starting point. This is a rate that is mostly constant across all lenders and is itself based on the Bank of Canada overnight rate. The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves.

Financial institutions set their own bank prime rates based on this overnight rate and on competitive pressures among themselves.  As the overnight rate strongly influences bank prime and therefore the variable mortgage rates, paying attention to announcements from the Bank of Canada is quite useful for understanding rate changes.

The Bank of Canada has eight (8) scheduled key interest rate announcements per year and apart from the announcement of what the rate now is, each announcement is scrutinized to try to determine what will happen in the future.  We have just two more announcements to take place this year.

For variable rate mortgages, we now see that the risk attached to cost of funds at a later date is effectively removed.  By signing you up for a variable rate, lenders assure themselves that whatever the changes, they can pass those changes on to you.  As such, the other factor influencing the rates – the lending environment – is what remains.

As discussed, lenders use their bank prime rate and offer variable rate mortgages based on it. Competition amongst lenders, however, dictates whether lenders offer below prime, at prime or above prime rates. While collusion is not permitted, in such a tightly interwoven marketplace, competition forces lenders to adjust very quickly to rate changes by other lenders.

This means that while Bank of Canada rate changes will certainly change the variable rate of your mortgage, competition between lenders will also affect what rates are offered for variable rate mortgages.

For consumers, variable rates need more consideration as any changes in the prime rate are passed right on to them. Choosing a variable rate that is lower than a fixed rate mortgage could seem smart, only to see the prime rate (and hence the variable rate on your mortgage) rise over time above what you could have been paying with your fixed rate mortgage.

While setting mortgage rates is by no means a simple process, understanding that the cost of funds (today and later) and the lending environment are the influences that effect what you as a consumer pay for your mortgage is a very useful concept.

So, which one is best?

Deciding which type of mortgage is best for you is very much dependent on your situation and your own comfort level with risk.

Your personal situation influences the rates you are offered and that can be due to many different aspects.

• If you have a particular professional background (such as being an engineer), you may be offered a discount on the rate being offered to the general public due to a lower perceived risk in the eyes of a lender.
• If you have a prior bankruptcy or debt consolidation on your credit record, you may only be able to get a mortgage from a “B” lender, who doesn’t offer variable rate mortgages, only fixed rates.
• If you have a significant down payment, you may find that the best rate comes with a variable rate mortgage. Conversely, if you are putting down less than 20% of the purchase price as a downpayment, you may find that fixed rates are better than variable rates.

Make no mistake, the rate you are offered differs tremendously based on your personal situation and which lender is most interested in the risk profile you fit within their lending criteria.  We recommend our clients use a mortgage broker to help find the lender that considers you a good risk so that you can get the best rate.

In addition to your personal situation, your own comfort with risk can determine which is the “best” type of mortgage for you to chose.  If you are uneasy with the idea of the interest rate fluctuating over time and potentially reducing the amount of principal you are paying down with your payments, then a fixed rate may be the way to go.  If you’re good with a potential upside (as well as downside) from changing interest rates, than a variable rate might make more sense.  Again, a qualified mortgage broker can help you work through the options, the differences and help you decide which makes the most sense for you.

While we don’t work as mortgage brokers or lenders, we do believe that your real estate agent should understand how mortgages work and the current lending environment.  It directly influences real estate markets and regardless of whether you’re buying or selling, you need an agent that isn’t blindsided by the impact of interest rates.  Get in touch with us if you’re thinking about making a move!

On Wednesday, September 4th, the Bank of Canada made its sixth (out of eight for the year) interest rate announcements and for the third time this year, they lowered the overnight rate by 25 basis points. Banks lowered their prime rate as a result, and it now sits at 6.45%.

As a quick reminder, the prime interest rate is the reference rate used by financial institutions to determine the variable interest rate they will offer for loans to businesses and individuals. It is the initial cost of borrowing money and while it can go higher (if the lender thinks you’re a risky loan) or lower (if the lender thinks you’re a safer loan), prime is where it all starts.

In the real estate world, the prime rate is critical as any homeowners who have a variable rate mortgage are directly impacted by a change in prime rate. Such mortgages are typically structured around an interest rate base on prime plus (or minus) a certain number. As a result, when prime goes up or down, the effective interest rate that variable rate mortgage holders pay goes up or down.

The 25 basis points (or a quarter percentage in layman’s terms) drop on September 4th was the third in a row and means that variable rate mortgages are now at a three quarters of a percent lower interest rate than earlier in the year. Given the high cost of real estate in Toronto and the GTA – and correspondingly high mortgage amounts – that is a welcome change for homeowners with this type of mortgage.

That being said, we’ve previously written about the relatively minor impact of a 25 basis point drop, which basically makes every $100,000 of mortgage about $14 cheaper per month to finance.

While that isn’t a lot of difference, we’ve now had three of these twenty-five basis points drop to prime, so it is starting to add up. Speaking of adding up, we thought perhaps it was time to do some simple math on what a variable rate mortgage costs at this new interest rate.

We were curious how much of an impact these drops have had on affordability and decide to look back to the last time interest rates were at (or very close) to this level. Our idea was to compare the cost for a typical 80% ratio mortgage, using the average price in Toronto and the other parts of the GTA, to see how much it would have cost on a monthly basis to own a home at the current variable interest rate.

Let’s get to it!

It feels just like Christmas.

Back on December 8, 2022, the Bank of Canada raised the overnight rate again and as a result, prime increased to 6.45%. The overnight rate went up three more times after that, and topped off at 7.2% (which made prime 5%) in July, 2023. After almost a year, the overnight rate started lowering, dropping once on June 5, 2024, a second time on July 24, 2024 and a third time on September 4, 2024. As the overnight rate dropped, so did prime.

We’re now back at the prime rate we had at Christmas in 2022, but the market has not seen significant change in average prices in Toronto or any of the GTA since that time. On paper that means that our housing market is more affordable now than it was almost two years ago, at least for people financing their homes with a variable rate mortgage.

We say more affordable, but that doesn’t equal affordable. We’re going to have to go back a lot further to do an apples to apples comparison for prime rate to see how unaffordable real estate really remains here in the GTA.

Wait, Apple makes phones now?

It was in 2007 that Steve Jobs introduced the first iPhone and while they are still around, they are quite different than the first one. That’s not the only thing that has changed since 2007, as we have seen incredible increases in average house prices in Toronto and the GTA since that time.

Despite the many chances since then, November, 2007 was the last time we had a prime rate as close to our current one. It was 6.25% rather than our 6.45%, but after November, 2007, it started decreasing and over the next number of years, it remained below our current level. This didn’t change until we hit it again in December, 2022 and then surpassed it, before coming back down again.

If variable mortgage rates were the same back in November, 2007, how did the lower real estate prices translate to mortgage payments and affordability? The answer is astonishing, so brace yourself.

Oh, right, first, the methodology.

We wanted a broad review that gave us some specific results, so we looked up some key datasets.

First off, we looked at the average price for a detached house now (August, 2024) and back in November, 2007. We did that for Dufferin, Durham, Halton, Peel, Simcoe, Toronto and York, so we’re not going to just give Toronto focused, or GTA averages. Oh, just for fun, we also did it for December, 2022, when we last briefly saw this same current prime rate.

Secondly, we took those average prices for those three times, assumed a 20% deposit and calculated the monthly payments for an 80% down mortgage with a 25 year amortization, using the prime rate of 6.45%.

Finally, we applied the standard 32% maximum total debt service ratio to calculate what you would need to have as a gross annual income to afford a detached home in each of those areas, both back in 2007, as well as in 2022 and now.

Let’s see what we found.

Welcome to Dufferin, hope you make 3X more than you used to make.

We’ll start with Dufferin, currently the most affordable place in the GTA to buy a detached house, with an average price of $949,000. That works out to over $5K a month in mortgage payments and in order to qualify, you’d need to make about $190K a year. Clearly, the “most affordable” doesn’t translate to “affordable” by most standards.

When we look back in November, 2007, you had to make about $59K a year to afford your mortgage payment of $1,560 a month on your $292,000 detached house. The interest rate may be the same, but the cost of the home means the income required has more than tripled since 2007.

This is unfortunately not the only area where incomes have had to rise drastically to be able to afford a detached home. In fact, in six of the seven areas we reviewed, incomes would have had to more than triple since 2007 to keep the same level of affordability for the current average detached house price. It will come as no surprise to you that this has not happened.

When did Durham start having million dollar houses?

Moving on to Durham, the latest average price for a detached home is just over $1M, meaning you’d need a family income of over $200K in order to qualify for your monthly mortgage payment of about $5,400.

When we look back to 2007, the average price was $310K and a family making about $62,000 could afford a home in the area.

Halton homes cost half a million. Oops, sorry, I mean one and half million.

Back in 2007, the average price for a detached house in Halton region was under $500K, meaning you could qualify for the mortgage and make less than six figures.

With a monthly mortgage of over $8,300 now for the average detached home, you better have a good job that pulls in over $300K gross. That’s assuming you have the 20% down for the $1.559M average detached house price!

Peel is middle of the pack, but you still better have money.

The results for Peel put it in the middle of the seven areas that comprise the GTA. It’s cheaper than Halton, York and Toronto, but more expensive than Dufferin, Durham and Simcoe. As of right now, you need an income of $266,000 to afford the $7,100 a month mortgage payment on a detached home.

Back in 2007, Peel was still very much a bedroom community for commuters and you could buy your own detached home for just over $400K, on an income of $84,000. Ah, the good old days.

Simcoe is no Dufferin, but it’s close.

When we turn to Simcoe region, it’s one of only two parts of the GTA where the average price remains below $1M. It’s a little bit more expensive than Dufferin, but not by much. Our current variable rate still means you’d need to have over $5K a month for mortgage payments, and you’d need to have a gross family income of almost $200,000.

Way back in 2007, a family income of $61,000 was enough to get you into the detached housing market, where about $300K would get you your own house, driveway and backyard.

Wait, Toronto actually got a bit more affordable? Well, kind of.

Toronto was the only part of the GTA where we saw less than a tripling of the income required to buy a detached house. Before we start celebrating in the six, we’ll point out that the current average price for a detached home is the highest in all of the GTA, at almost $1.7M. That means your mortgage is over $9K a month and your gross income has to be around $339,000 to qualify.

The reason why Toronto didn’t have as big a jump in unaffordability is because it was already pretty unaffordable back in 2007. The average price of $614,000 was more than double a few other areas of the GTA, as was the income required to buy in the city. Toronto went up by 2.8x when we look at August, 2024 but given everywhere else was around 3.2x, it seems like it works out well if you start off being expensive.

York comes in a very close second.

Finally, when we turn to York region, we have an average price of $1.665M, just a bit below Toronto. The monthly mortgage payment for the average detached home would be just under $9K, and you need a cool third of a million in annual gross income in order to qualify for the purchase.

York was pretty expensive back in 2007, with an average price of over $500K meaning you’d need to be clearing six figures to afford your $2,800 a month mortgage payment. It has more than tripled since then and at this rate might catch up with Toronto soon!

Despite the challenges in affordability that persist in the GTA, we are actively working with both buyers and sellers to help find the path forward.  If you’re thinking about a move and want to understand your options, then we’d invite you to get in touch!

There is lots of talk about the lack of affordable housing in Toronto and other cities in the GTA and we decided to do a dive into what constitutes “affordable” and whether such homes exist these days.  The somewhat surprising answer is that yes, there are some homes in Toronto that are affordable.  Well, there are about 2,000 condo apartments that fit the bill, and, let’s see, two houses that qualify.

Let’s examine what constitutes “affordable” and then look at what options exist in the city.

Some Quick Math

If we look at the average income in the city of Toronto (about $132,000) and we take the recommended maximum people should spend on housing (32% of gross income), we’re left with about $3,530 to spend on a monthly basis on your mortgage and property taxes.  If that doesn’t sound like it would give you much of a budget, you’re absolutely right.

At current rates, you could get a $500,000 mortgage for about $3,080 a month in principal and interest payments.  That’s based on a five year fixed rate of 5.6%, amortized over 25 years.  Add in property taxes of about $5,000 per year and you’re looking at monthly housing costs of about $3,500.  If we say you’ve got the 20% downpayment of $100K, that gives you a budget of $600,000.

While that’s not the highest budget, it does give you some options for homes that qualify as affordable using the above rationale.  Let’s review.

Affordable condos for everyone!

As of June 14, 2024, there are over 2,600 available condo units for sale in Toronto that are listed at below $600,000.  The median price is about $548,000 so there is definitely a huge amount of affordable housing options on the condo side of the equation.

With prices starting as low as $275,000, our condo market is truly the saving grace in the city for people who want to own real estate but have limited budgets.  If you are interested in a condo, you’ve got a huge amount of options across the city.  What about if you’re dreaming of a freehold home in Toronto?

Eight options isn’t bad, right?  Wait, are they options?

When we search for freehold houses for sale in Toronto as of June 14, 2024, we have 3,160 properties on the market.  The median price for those homes is about $1.649M, which puts them about one million dollars more than what we’re saying is “affordable” for the average Torontonian.

If we set a maximum price of $650,000, that number drops from over 3,000 options to just eight properties.  Four of them are properties listed at $1, which is a marketing tactic designed to draw attention to the listing.  None of the four properties are actually available for purchase for anywhere near $600K, so we’ll remove them from the equation.

One of the four remaining properties is a property that was previously listed for $898,000 and is now listed at $599K with an offer date.  If they wanted almost $900K before, they likely wouldn’t take anything even close to their current list price, so we’re going to remove it as well.

That leaves us with three properties.  Well, actually, two properties and one houseboat.  Yes, that’s right, one of the three affordable freehold homes in Toronto is in fact a boat.  For just $649,000 you can own a one bedroom, one washroom houseboat in the Scarborough Bluffs.

Let’s look at the two options for affordable freehold homes you could purchase in Toronto as of today.

Dundas & Annette Semi-Detached for $600,000

The most affordable listing for a freehold home in Toronto, this semi-detached house sits on a reasonable 19 ft wide by 88 ft deep lot in the Junction neighbourhood.  It’s got three bedrooms, plus one in the basement, and a full bathroom on the 2^nd floor and a powder room on the main floor.  There’s no parking but it’s located on a small side street off of Dundas, so street parking is an option.

If you’re wondering why it’s so cheap, it does come with a few caveats.  There’s no AC in the home, nor is there central heating, as the heating is provided by baseboard and electric heaters.

In addition, it is tenanted and there are no pictures of the interior, so it seems likely that the home isn’t in great shape.  That is reinforced by the fact that in the listing it says “The seller provides no warranties regarding the structure, electrical, plumbing, foundation, roof, furnace, condition, sizes, air quality, or AC/heating units.”

In short, it’s an affordable home, but it is likely in need of some significant renovation.  Installing AC and central heating will cost a fair bit and if there are structural issues, problems with the roof or the windows, then costs will rise quickly.

It’s been on the market for 23 days as of today, so there might also be a bit of flexibility on that list price.

Davenport & Caledonia Townhouse for $635,900

Our second affordable option for a freehold home is located just a few blocks north east of our first home, up in the Pelham Park neighbourhood.  It’s a townhouse that sits on a 15 ft wide by 120 ft deep lot and while there is no parking, the deep lot could allow for a garage or even laneway house off the public laneway behind the property.

It is listed as having three bedrooms, plus two more in the basement, with just one full washroom on the 2^nd floor.  It has an unfinished basement and the heat is provided by forced air but with an oil tank, and there’s no air conditioning.  Originally listed at $729,000, it’s been on the market for 35 days as of today and is now listed at $635,900.

This is an estate sale and once again the home is being sold in “as is, where is” which means buyer beware.  The home is brick, which is a good sign, but the photos definitely show some signs that the house has settled significantly in its 100 plus years of existence.

Both the front porch and the rear porch look pretty worn and the interior is very dated and basic.  There is evidence of knob and tube wiring in one of the photos and it seems likely the walls are all lathe and plaster.

In short, it would require a to the studs renovation, with all new electrical and plumbing as well as AC and heating.

Add in drywall throughout, windows and flooring and even before you get to putting in fixtures you’re looking at significant costs.

If you’re looking for affordable housing in Toronto, it seems like condos are the only option as of mid-June, 2024.  While there are technically two freehold homes that qualify as affordable, both require significant renovation that would likely push the cost up by at least $100,000.

If you like the idea of finding a home that needs significant work and making it your own, we’d love to help you find the best option.  Get in touch with us to start the ball rolling!

We’re less than a week away from a highly anticipated overnight rate announcement from the Bank of Canada.  Does this mean interest rates are about to drop?  If so, how much and are more coming? More importantly, how will this impact real estate markets?

We’ve looked at what’s likely to happen and come up with our analysis on the likely impact.  Let’s review how we got here and what’s coming next week.

Ah, the spring of 2020…let the good times roll!

On March 27, 2020, the Bank of Canada dropped the overnight rate by half a percent to 0.25% and kept it at this record low level for almost two years.  As the overnight rate directly influences lenders’ prime rates, we saw very low interest rates being offered on variable loans and lines of credit, including variable-rate mortgages.

It was a very good time to borrow money and lots of people took advantage of the low rates making the payments on mortgages affordable – well, payable.

Then came the spring of 2022.

After almost two years of these low, low rates, the Bank of Canada began to raise the overnight rate on March 2, 2022.  We saw ten increases in the overnight rate from March, 2022 to July, 2023 and since July 12, 2023, the overnight rate has been steady at 5.00%.  Canada’s prime rate went to 7.20% and remains at that level.

Anyone who had signed up for a variable rate mortgage in that two-year period of very low rates (basically spring of 2020 to spring of 2022) experienced their rates rising at a very rapid pace. The affordability of their mortgage payment went away for many homeowners and at the same time lots of potential home buyers saw their ability to afford a mortgage disappear.  The result was a tremendous slow down in the number of sales and considerable fluctuations in the average price for real estate in Toronto and the GTA.

Welcome to the summer of 2024!

After almost a year of no change to the overnight rate (and therefore prime rate), it seems likely that we are about to start seeing some change!

Just a little bit over 75% of economists (22 of 29) are predicting that the Bank of Canada will cut its key interest rate by 25 basis points to 4.75% on June 5, 2024. Financial markets have already priced in slightly more than a 60% chance of that, so most of the smart people in the finance industry think change is coming.

Is this the start of interest rates dropping back to their old levels?

The short answer to that is no.  It seems very unlikely that we will return to anywhere near the record-low interest rates we saw back in early 2020.  The COVID pandemic made central banks in many countries take unprecedented action to stimulate the economy and Canada was certainly no exception.

While we won’t hit that sub 1% level this year (or perhaps ever again), the overwhelming majority of economists expect at least three rate cuts this year.  If June sees the first of these cuts, that leaves two out of four more overnight rate announcement dates where we could see further price drops.  After June 5, 2024, the rest of the dates are as follows.

• Wednesday, July 24
• Wednesday, September 4
• Wednesday, October 23
• Wednesday, December 11

There is some disagreement amongst economists as to where we will end the year, but the median forecast for an end-2024 rate is 4.00%, with the dissenting economists (about half) saying 4.25%.  This means that from our current (as of today, May 31, 2024) overnight rate of 5% will drop somewhere between .75% to 1% over the course of the year.

How much of an impact does a 0.25% interest rate cut actually have?

In order to answer this question, we need to look at it from two perspectives.

The first is the actual dollar impact.  With a current typical variable rate of 5.9%, the monthly payment for every $100K of mortgage is about $633.  If the Bank of Canada drops their overnight rate to 4.75% and lenders drop prime accordingly, then we would see that variable rate drop to 5.65%.  That lower prime rate results in a monthly payment of about $619 for ever $100K of mortgage.  Yup, about $14 cheaper.

If you had an $800K mortgage, that would mean that your monthly mortgage payment of $5,064 would drop by $112 to $4,952 per month.  An improvement, but nothing that will cause you to open bottles of champagne to celebrate!

If the actual dollar impact isn’t much, the other aspect to consider is how it impacts people from a perspective stance.  With prime at 7.2% for the past year and no indication of it lowering, people began to consider this the new normal.  Any homeowners who found their mortgage payments no longer affordable came to the conclusion that things weren’t improving anytime soon and sold, sometimes at a loss.  Prospective buyers who were waiting on lowering mortgage rates to make a home affordable decided that home ownership might not be in the cards for them.

From this perspective, the impact of a lowered interest rate – with more to come over the course of the year – is much more meaningful than the actual dollar impact.  Home owners with variable rate mortgage who have held on to their properties will see some small relief in their payments and will feel better about keeping the home longer.  Buyers who could have afforded to purchase over the last year but who were nervous about where rates were going may now feel confident about moving forward with a purchase.

Will the end of the year be a whole different ball game?

Will the forecasted end of year overnight rate of between 4.25% to 4% have a huge impact on people in terms of dollars?  If we take the most optimistic scenario where the overnight rate goes from it’s current 5% to 4% by the end of the year, we see some more significant dollar impacts, but not really anything that will change the market as a whole.

Our current $633 per $100K of mortgage would drop down to $575 per month if we see prime drop by 1% by the end of 2024.  That’s $58 per month and works out to a savings of about $464 per month if you had an $800K mortgage.  While any drop in monthly payments is useful, going from a mortgage payment of $5,064 to a mortgage payment of $4,600 isn’t exactly a sea change.

While predicting markets is a difficult thing to do, we’re confident that what’s coming will have a small impact on real estate sales and prices.

We are predicting that these forecasted rate drops will encourage some home owners to keep their properties longer, which means a slight drop in the number of homes hitting the market.  At the same time, we think that buyers who were already able to afford the payment (or who were on the cusp of affording it) will move forward into making a purchase.  It should mean an increase in the number of sales in the latter half of this year, but not to a significant extent.

If you’re thinking about buying or selling this year, depending on how things go with interest rates, then we’d love to help you navigate the changing landscape.  Get in touch with us to have a discussion about the best approach!