Last month, the average home price was $1,074,754, up 1% from $1,061,724 in July 2021 but down 6% from $1,145,994 in June 2022. More than $1.1 million, or 12.9% more than the previous year, was the composite benchmark price.
Toronto and its surrounding areas were at the centre of a national housing boom that saw benchmark prices increase by more than 50% in just two years, and now they are leading the way down as well. Southern Ontario saw the first price declines, and so far there has been a greater decline there than in other parts of Canada. Real estate, both commercial and residential, moves in cycles that are frequently closely correlated with regional and global economic trends. The "real estate cycle" is a cyclical pattern that has four main phases.
Recession: During the recession, supply has outstripped demand, and as a result, demand falls, leading to high vacancy rates and negative rent growth (or rent growth below the rate of inflation). Since properties will be available for rock-bottom prices during this phase, some opportunistic investors will search for accessible investment opportunities (especially foreclosures). Then they wait for the market to recover and eventually expand as the real estate cycle turns around and the downturn is over.
Recovery: The real estate cycle is circular, so the recovery phase comes after the recession phase, despite the fact that it is frequently listed as the first phase. Beginning at a low point from the recession phase—occupancy and rental rates are low, and new construction slows—the real estate market gradually gains strength during the recovery phase. Rental growth, if it occurs at all, is below the rate of inflation. Since the market will largely resemble that of the recession phase, it can be difficult for individual homeowners or renters to distinguish between the recovery stage and the latter. Experts look for trends, such as gradual occupancy increases or rising demand, to determine when the recovery stage has started. Since property prices are low (especially for distressed properties that need renovations), the potential return on investment from operation or resale is high, making the recovery phase a popular time for real estate investment and speculation.
Expansion: The real estate market has fully recovered from the recession phase and is in the midst of an extremely strong period. Vacancy is low, rent rates are high (and rising), property values are high, and new construction is frequently seen when the real estate market is expanding. Since there is a high demand for rental properties and new tenants are frequently easy to find, the expansion phase is a typical time for real estate investors to purchase new rental properties or renovate existing structures.
Hyper supply: As already begun construction projects continue to wrap up, the supply will finally catch up to and surpass high demand during the hyper supply phase (also known as the oversupply phase). Rent growth will slow, and vacant spaces will increase. Some real estate investors will purchase homes during this period from businesses that are concerned about the approaching recession and eager to sell at a better price. Then, when the expansion phase comes around, these investors will sell (often called the buy and hold approach). An additional popular investment strategy is to purchase a tenant building that is fully occupied and has established long-term leases because it will continue to generate a consistent cash flow throughout the upcoming recession.
Will 2023 be a favourable year to purchase a home?
More inventory may arrive later this year or early in the following year, but we cannot say with certainty. And if inventory continues to be low, 2023 may prove to be a similarly challenging year for homebuyers.
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