Market Update - January 2023

2023, A Generational Opportunity To Move “Up” 

Upsizing; meaning to trade, via transaction, a comparatively smaller living space for a larger one: either within the same asset class; one bedroom condo to a two bedroom, or between asset classes; a condo up to a town, a town up to a detached.

Short digress - Some of the following similarly applies to getting into the market for the first time, to first time buyers. Have you heard the examples of savvy individuals - trading up from a paperclip to the likes of a car or home? It’s easy to convince ourselves to wait for the right opportunity, or the picture perfect dream property - I assure you, its much simpler to MOVE UP in any market once you’re already in the owners club. Start with what’s comfortable, attainable and within budget. Your first home doesn’t have to be (and shouldn’t be) your dream home, but it will certainly enable you to get there! A journey of a thousand miles begins with a single step.

Back to upsizing - why is this an opportune market to make such a move? With the uncertainty in todays market, interest rate hikes, recent compression of values across all sectors down from the “covid-era” highs. Why does it make sense to make the jump? There are a number of factors we will break down.

1. Inflation - it’s here to stay.
?Inflation de-values currency, meaning purchasing power drops! The same movie ticket that may cost $14 today, will cost $17 tomorrow… at least that’s the concept. That means we need to find ways to hedge against this market factor. In terms of moving up, we can attribute the same rule to debt. If currency or cash, dips in value - that means that the funds we borrow (in real estate we would be looking at mortgages) also decrease in value. This makes borrowing more an attractive opportunity. Similar to the movie ticket example - if we borrow one million dollars in the form of a mortgage from a lender, and market inflation is 5%, that one million dollars is eroding at the same annual rate. Apples to apples the same one million in debt is now only worth nine hundred fifty thousand - we just found $50k by borrowing money! That said, when we move up in asset class, it pays to borrow more, within reason. Inflation is not all bad if we know how to leverage the advantages.

2. Prices and Percentage Drops
The way percentages play on values are quite simple to comprehend. 10% of a larger number, is a larger number! Meaning, 10% on one million dollars is $100k, versus the same 10% on one hundred thousand is only $10k in contrast. When looking to move up, especially in this market that has experienced dips - the gap between the asset classes has shrunk. Your condo may be valued at $650k in todays market versus the $750k in peak January 2022. Losing value on your real estate is not fun - but it can be if it means that your intention is to liquidate and deploy the same capital on a more valuable assets such as a town home or detached - which may hold value today of $900k but in the latest peak, could generate as much as $1.1m. That’s a more significant drop in asset price. Slightly higher percentage, yet a significant dollar value is evident. If the intention and goal is to trade upward; we can find value in the tradeoff - sacrificing our $100k drop for the purchase of an asset that has dipped $200k. Moving up today makes a lot of sense when you account for dollar value drops as a percentage on larger, move valuable assets. The same is true on the rebound, as we see rates begin to normalize and ultimately come back down, we shall see a rebound in asset pricing. Play the long game and capitalize on the future appreciation, again as a percent. When asset values appreciate; lets assume conservatively 5% annualized over a 3 year period - that’s 15% on a more valuable piece of real estate with a lot more upside potential combined with less additions of said asset class coming to market. 15% on a $650,000 condo may be a +/- $100,000 gain, but on a $900,000 asset, the same 15% equates to a +/- $135,000 gain! Play the market efficiently but understanding that we can make educated prediction based on fact.

3. What Goes Down Must Come UP
Isaac Newton articulated that science of gravity by examining an apple falling from a tree, studying the force of gravity - the inverse is also true! Maybe not in gravity terms, but in the longevity and resiliency of our real estate market. There are way too many positive factors influencing the price of real estate in Toronto and the GTA to ignore. Both macro and micro markets must be examined in great detail, with no stone left unturned, to truly comprehend the uniqueness and potential of Toronto real estate. Unparalleled post-secondary institutions attract international attention and draw employers to open headquarters in the GTA providing a multitude of quality job opportunities; our stable political and economic climate allow for confident investment and capital deployment, insatiable and undersupply rental housing options maintain demand for rental housing, and ambitious immigration targets mean more bodies in need of a roof. For these reasons and many more; the fundamentals that make for a bright green light regarding investment - and a much more elastic rebound under current market conditions.

Overall, the “gap” to jump has shrunk significantly, making the spread between asset classes smaller and more manageable. Inflation makes borrowing an asset and our market fundamentals are poised to propel Toronto and GTA housing to new heights. For more on what makes todays market conditions a generational opportunity to “move-up” or jump into the market for the first time, don’t hesitate to reach out and schedule a call with an award winning member of our National Top 1% Realty Team, Tyler McLay Realty Group.

All the very best in 2023 and beyond,