Toronto Market Reheating

Recent media reports have seized upon the February data for prices and sales to suggest that the Toronto market may be in decline. Indeed, prices and sales in February were both lower than the same time last year, however, I would contend that this conclusion is an extreme example of recency bias.

What do I mean by this? Well, let’s zoom out a bit and put the latest results in better context.

As most will remember, we had a bubble in the Toronto area over the past two years. Prices started accelerating upward during the latter half of 2016, accelerated further early in 2017, and then fell precipitously from April through August. By the end of last year, prices were slightly below the same time in 2016. Since then, prices have started inching back upward and, by the end of February, were about 4.5% above the low point reached last December — as shown in the chart below.

Now for the perspective. If we go back before the bubble started inflating, we find that prices increased, year-over-year, by just under 8%/year on average from 2010 through 2015 (the range was 5%-10%). The year-to-date average price for February, 2018 was $753,747, which is 30% higher than the corresponding February, 2015 average price of $578,575. This is equivalent to a 9% annual rate of increase compounded over 2015-2018. In other words, had the bubble never happened, today’s average price would be slightly higher than what would have been expected if the 2010-2015 trend had simply continued uninterrupted. So much for the market being in decline.

Also, the trend this year is clearly upward. While we don’t have a lot of hard data as yet, we are seeing a return of bidding wars in the the ‘hot’ east, west and central pockets. There is little doubt that prices will continue to rise through the next 2-3 months, likely following a pattern similar to what we saw every year before 2016. The new mortgage rules, together with slowly rising interest rates, will probably keep the market from getting overheated, but it will nevertheless be strong and healthy.

Inventory data confirm this trend, as seen in the chart below. In February, there was approximately 2.6 months’ supply of homes for sale, down from 3.0 months in January, and suggestive of a relatively balanced market leaning a bit more toward sellers than buyers.

The divergence between the condo and freehold markets also continued last month. Condo prices are approaching the all-time high reached last April, while freehold prices were higher than 2016 but still considerably lower than last year. While we don’t have any definitive evidence, common sense would suggest that reduced affordability is the key driver behind this shift from higher-priced to lower-priced residential properties.

Regarding freehold prices, the shape of the curve below suggest that, if the market continues on its present track, prices should cross above year-ago prices by sometime this summer.