In Toronto and the GTA we’ve largely been able to ignore timing in real estate for the past couple of decades.  We’ve previously talked about how the average annual increase in price over the past 45 years has been 7% per year and only seven of those 45 years saw a price drop rather than an increase.

It’s no wonder that people started thinking it didn’t matter how much a home costs now, it would be worth more later.

While there have always been fluctuations in the average price over the course of the year, it’s been relatively rare to see homeowners in the GTA buy a home and have it worth less than what they paid when they go to sell it.

We’re seeing a combination of factors right now that is causing that rare event to be much more common.  While there are lots of nuances to what causes a particular home to rise or fall in value, the big fulcrum upon which real estate prices change is supply and demand.  With decades of demand driven by extremely low financing rates and limited supply being built, prices rose.

Due to the significantly higher cost of financing, particularly on the variable rate mortgage side, demand has slowed down tremendously.  At the same time, home owners who are facing difficulty in paying the increased cost of their mortgage are deciding to sell, resulting in increased supply.  Less demand and more supply mean that prices drop, as those buyers who are in the market have their choice of homes.  The September 2023 stats show us that across Toronto and the GTA we are seeing the highest level of active listings in more than two years.

We are regularly having conversations with homeowners now who are considering selling their home.  In some cases, when they have bought in the last few years, when we do the valuation for the property, it is worth less now than when they bought it.

We spent some time developing three key questions that homeowners need to consider before deciding if now is the right time to sell.  Let’s get into it.

Question #1 – How much is your home worth?

You can’t make decisions without information and the most crucial piece of information you need is the current value of your home.

It is a well-known axiom in real estate that buyers live in the future and sellers live in the past.  In a shifting market with prices dropping, it is more important than ever to choose a real estate agent who knows how to properly value a home.  Buyers will be looking at what is happening in the market and trying to forecast what is coming next and your agent needs to have a justification for why the home is worth the price we’re asking.

While it is true that market value is determined by what a buyer will actually pay for your home, a proper and thorough valuation gets you a price that we can say with very high certainty is what a reasonable buyer would pay.  When you combine proper pricing with effective marketing and aggressive negotiating, you get the highest possible price.

Once you know this current estimated value of your home, we move on to the next key question.

Question #2 – What’s it cost to sell?

While it may seem obvious how much it costs to sell a home, this question requires the homeowner to go beyond just calculating the real estate commissions and to look at all the expenses involved in the sale, as well as their net gain or less on the property.

We recommend this approach for both owner occupied as well as income properties.

The answer to what it costs to sell includes the following components.

  • Real estate commissions including HST. If you’re considering hiring a discount brokerage with lower real estate commissions (on either the seller or buyer side, or both), make sure you are confident that such an agent can still get you the estimated sale price you received in the above question.
  • Legal fees.
  • Bank fees, including any breakage fees that may be incurred if you break your mortgage. These can be very significant and if you are not able to port your mortgage in full or part to another property, or if you are exiting home ownership for now, make sure you ask your lender for a payout statement so you know the true cost.
  • Paying out your existing mortgage and any lines of credit attached to the home equity.
  • Moving costs.
  • Any other costs incurred prior to listing such as updates or renovations to attract buyers.

When you add up all of these costs and subtract them from the estimated sale price of your home, you’ll end up with a number that is effectively your walk-away number from the property.  If you were heavily leveraged, purchased recently and the market has lost value since then, you may find that this number is either very small or possibly even a negative number.

There are significant costs to buying and selling your home and while property appreciation has absorbed those costs quickly in the past few decades, in a shifted market you may not be in the position you hoped after this calculation.

A final caveat is that if you are planning on buying another property to replace the one you’ve sold, make sure you include the transaction costs for that purchase in your calculation.  Land transfer tax and high ratio mortgage insurance can add tens of thousands of dollars to a purchase price and whether it is paid up front or amortized into the mortgage, it always reduces your effective buying power.

Question #3 – What’s it cost to stay?

The last question you need to answer before you decide if now is the time to sell your home, is the cost to continue to own the property.

Many homeowners understandably focus on the cashflow aspect of this question.  In most cases, thinking about selling is driven by the monthly costs increasing to a point that is difficult for the homeowner to cover.  While you likely have a very good idea of how much it is costing you each month for the home, let’s review the big ticket costs.

  • Your mortgage payment, including principal and interest.
  • Your property taxes, if not included in your mortgage payment.
  • Your utilities.

When you look at your monthly income and your monthly expenses, it is likely that your housing cost makes up a significant (and growing) percentage of your expenses.  If you are starting to accrue other debt and struggling to manage payments and to provide for your family, selling seems like the only logical solution.

Before deciding to sell, we advise our clients that they take the negative cashflow number they are seeing and their estimated current home value before transaction costs and do another calculation.

(Negative Monthly Cashflow x 12) / Current Estimate Value of your Home BEFORE Transaction Costs

For our purposes here, the negative cashflow number is how much you’re “losing” or how much of a hole you’re digging for yourself each month. We’d suggest you focus on negative cashflow related to your home but if you want to put in the total amount you’re struggling to cover, you can do that as well.

Here’s an example.

$36,000 ($3,000 negative monthly cashflow x 12) divided by $1,119,452 (current average price in Toronto) equals 3.22%  This means that if your home goes up by 3.22% in the next year, you recover the negative cashflow you saw go out during the year.  You’d also be avoiding all of the transaction costs associated with selling the home.  Whatever percentage you get, consult with your trusted real estate advisor to see if the home is likely to appreciate by that much over the next year.  If the answer is yes and you’re comfortable with the assumptions and logic in that forecast, then finding ways to manage the negative cashflow may be better than selling.

The above calculation is only as accurate as the numbers plugged in and both sides of the equation have considerable uncertainty.  Will interest rates rise or fall, thereby changing your negative monthly cashflow?  Is the percentage required to let you break even at the end of the year likely to occur?  These are complex questions but we still feel it is worth considering whether it is reasonable to try to hold onto the property.

The lower the required percentage increase to recover from the negative cashflow, the more it is likely that figuring out a way to hold on to the home makes sense.

We are firm believers in the value of real estate as a foundation for wealth and during challenging times like this, we work with clients on the sell side to make sure selling is in fact the right choice.

If you’re facing a situation where holding onto the property is becoming more and more challenging, then get in touch with us.  We won’t start with the assumption that selling is the right idea and we’ll help get you in the information you need to make the best choice to move forward.