The upper tier of Canada's real estate market is starting to “normalize” again following two years of unprecedented growth, fuelled by pandemic buyer demand, a record-low cost of borrowing, and chronic housing shortages in markets across the nation.

Conditions began to fall back in line with historical norms in the second quarter of this year, according to Sotheby’s International Realty Canada’s Top-Tier Real Estate: Mid-Year Report, as rising mortgage rates, inflation, and geopolitical volatility are dampening the demand for housing. However, while balance is starting to slowly return to the market, luxury real estate has remained in high demand in Canada’s biggest urban centres.

“We’re coming off a few years of what has really been a record breaking anomaly in terms of the real estate market,” Don Kottick, President and CEO of Sotheby’s International Realty Canada, tells STOREYS.

“We’ve seen the seasonal and cyclical fluctuations that we’ve been used to prior to the pandemic blown out the window and now I think what we’re seeing is almost a return to a more normalized market. Obviously there’s nuances in different markets across the country.”

He adds that while the market will likely reel in the short term as a result of freshly-hiked interest rates -- the Bank of Canada implemented a surprise 1% increase to its Overnight Lending Rate last week -- that it continues to be underpinned by chronic undersupply will continue to bolster demand, with activity to pick back up in time for the fall market.

“I think different segments of the market are going to be hit harder,” he says. “Obviously the first-time buyers -- it’s going to be a little more difficult for them to borrow money, and the conventional market will be somewhat influenced by what’s happened. When you get to the luxury and the ultra-luxury space, they’re not as dependent on interest rates as they are in the two other segments.”

In all, Kottick says luxury markets continue to show robust activity across the country, even taking into account last year’s record-breaking trends.

Toronto: A Slow But Steady Return to Balance

As Canada’s largest luxury market, the Greater Toronto Area started to see a slow return to balance in the first half of the year, though sales of homes priced over $4M still outperformed last year’s numbers by 7%. This was seen across all luxury home types, including condo sales, which rose 13%. 

READ: Average GTA Home Prices Down $200K  From February Peak

While sales of single-family detached homes in this price range rose just 6% year over year, Kottick says this reflects a lack of available inventory, rather than drooping demand. That in turn has put more pressure on the attached luxury home market, which saw sales double in the first half of the year, surpassing the first six months of 2021. 

“I think it comes back to, in Toronto, the chronic undersupply of homes, especially when you get into detached,” he says. “Once you have a shortage in one market segment, it filters to other market segments, and then people will go to, ‘Ok, what is the next closest classification of homes?’”

Across all home types, sales of homes priced over $1M dropped 10% annually in the region.

However, the ultra-luxury segment -- homes priced over $10M -- continued to sizzle with a total of 16 transactions, one more than the record set in the first six months of last year.

Vancouver: Buyers and Sellers Hit the Sidelines

Canada’s largest west coast city saw the most dramatic turnaround in activity and consumer sentiment between the first and second quarter of 2022, as the frantic buyer urgency that prevailed during the pandemic began to calm; residential sales over $4M declined 18% year over year, with just nine properties over the $10M mark selling on MLS, compared to 16 between January and June last year. 

Post-pandemic buyer mood “shifted sharply in March,'' reads the report, due to “a global backdrop shadowed by darkening geo-political conditions, Vancouver real estate buyers and sellers confronted steadily rising mortgage rates, record real estate prices, and surging living costs with increasing unease.” 

READ: Metro Vancouver Home Prices Slip 2% From May to June

While the market’s supply and demand fundamentals remain strong, rapidly evolving conditions prompted buyers and sellers to take a beat, retreating to the sidelines of both the conventional and luxury housing markets.

As a result, $4M-plus single-family detached and attached home sales fell 22% and 40%, respectively, while luxury condo sales rose 32% annually. Overall, residential sales over the $1M mark dipped 18% in the first half of 2022, reflecting improved market balance in the city. 

Calgary: Canada’s Leading Luxury Contender

Wild rose country is starting to make a name for itself in the luxury home market; Calgary saw the greatest sales gains in homes priced over $1M of all metropolitan housing markets, with activity surging 40% annually. The $1M-plus single-family segment rose by 36%, followed by a whopping 85% increase for attached home sales, and 89% for luxury condos. A total of five properties sold over $4M where one had sold above this price point in the first half of 2021. 

The city is experiencing somewhat of an economic resurgence, as consumers and businesses regain confidence post-pandemic. That local real estate, even in the luxury segment, is comparable in price to other major markets has also been a draw, boosting in-migration and investment from other Canadian cities.

“Affordability definitely has a hold, and there is also a lot of optimism right now,” says Kottick of Calgary’s fortunes. “They’re coming out of the Calgary Stampede and it was like a rebirth for that market; the pride of being an Albertan, and the business confidence. There’s a lot of businesses that are considering moving to Calgary just because there’s the tech market has picked up there too, and there’s a lot of commercial property; you can get a lot more for your home and so the cost of living isn’t as high as it is in other parts of the country, and that’s why we’re seeing a lot of people leaving Ontario and heading west.”

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