March Prices Pause, But Sales Explode And Inventory Plummets

For many years we have had a sort of ‘bimodal’ spring market in Toronto. During the ‘early’ spring market, from mid January until early March,  buyers return to the market after the Christmas/New Years break more quickly than sellers, who often want to wait until leaves & flowers return, or at least until the snow is gone. The result is a fall in the inventory of homes for sale, together with a rapid increase in prices, as buyers are eager to snap up the meager early listings before prices really take off later in the spring.

During March, there has typically been somewhat of a ‘lull’, with prices increasing less quickly. The consensus theory is that this is mostly due to March Break, when many buyers and sellers take a bit of time off from real estate, sort of like the summer slowdown. This year has followed the usual pattern in terms of prices, with the average price for March up only slightly as compared with February (though still 12% ahead of last year).

While prices leveled off a bit in March, however, the number of homes sold increased sharply. Sales were up by 16% over the same month last year while the number of new listings that came on the market was actually lower, by 4%, than in March, 2015. The result of this was a very steep drop in the inventory of homes for sale, to just over one month’s supply. This is beyond “strong sellers’ market”; we have an extreme shortage of homes for sale. The dearth of inventory, and the bidding wars that this spawns, are the main reasons that prices have been increasing so quickly.

Why is there such a large imbalance between supply and demand? In addition to ultra-low mortgage rates, which have been the jet fuel driving the market for some time, there are  three reasons:

  1. The influx of foreign buyers. This is certainly a large factor in Vancouver, but not so much, in Toronto.  A recent CMHC report shows increasing foreign investment in the condo market in Toronto, and this certainly seems to be boosting condo prices so far this year, but it’s only a small contributor to the accelerating single family home segment.
  2. A bigger factor is that there are simply not enough homes being built in the Greater Toronto Area to meet the demand from home buyers. The blame for this shortage falls on the politicians and planners, both provincial and municipal, and the land use restrictions they have in place that are limiting the supply of homes being built.
  3. Perhaps the most important reason of all, however, is the self-reinforcing quality of inventory reduction. Here’s what I mean  by that:
  • As inventory falls, it gets harder for buyers to purchase, and easier for sellers to sell.
  • For move-up buyers, this means that the decision as to whether to buy first or sell first skews more and more toward ‘buy first’, as they can be very confident that their house will sell quickly once they finally are able to buy.
  • The decision to buy first is made even easier by mortgage lenders, who will accept a firm Purchase and Sale Agreement on the current home as collateral for a ‘bridge loan’ to buy the new one — so it isn’t necessary that the sale of the current home be closed before that of the new home.
  • So, all those homes that could potentially add to the inventory of homes for sale won’t come on the market until the owners buy something, and there’s little to buy because the potential sellers haven’t yet been able to buy.
  • You can see how this pattern will tend to progressively reduce inventory, which is exactly what has been happening in recent years. It seems unlikely that this pattern will break any time soon.

The second phase of the spring market, from early April until about mid June, is now underway. Usually, this is the busiest and highest-price part of the year and, with inventories already so low, it promises to be a very active late spring market indeed.