Leaner Toronto Market Remains Strong

Media reports continue to focus on how this year’s market conditions compare to the same time last year, and therefore continue to misconstrue what is really going on.

Last month total sales (number of homes sold) were 40% lower than the same month last year, and the average selling price was 14% lower. Year-to-date results are similar, with sales down 35% and prices down 12%. Sounds like the market is falling, right? Well, no, that’s not right at all.

The proper context is required to understand what is going on in the market. As pointed out in the previous post, we experienced a short term aberration in the market between mid 2016 and mid 2017, during which time prices and sales increased rapidly and then fell back down to where they started (see the chart below). So, yes, prices now are much lower than at the peak of this ‘mini bubble’ last spring — but, by May, we will likely be reporting prices higher than last year.

A better context would include the trend in the market over the past 10 years or so. During that time, prices increased reliably by about 6-8%/year, every year, until the bubble started inflating in mid 2016. Prices this year are, in fact, about 14% higher year-to-date than in 2016, pretty much double the average rate of increase from 2008-2015. In other words, had the bubble never happened, prices would have been almost exactly where they are now.

While prices are more or less where they ‘should be’, and are increasing steadily, sales remain well below historical levels. Not the 35% difference between this year and last year, but more like 15% below the typical sales prior to 2016. This is undoubtedly due to the recent changes made by the government aimed at curbing the market (tougher mortgage qualification rules and the foreign buyer tax) as well as slowly increasing mortgage interest rates. The net effect is that affordability has been compromised, and this has the following effects:

  • Fewer first time buyers can afford to buy houses, so they are buying condos or continuing to rent – this has strengthened both the condo resale and rental markets relative to the freehold resale market.
  • Fewer homeowners can afford to move up and, since most of the homes for sale are the result of move-up buyers having bought, this means that there are fewer homes available for the buyers who can still afford to purchase.
  • The net result, somewhat surprisingly, is that the inventory of homes for sale is dropping and we are once again entering into sellers’ market territory. There are fewer buyers and fewer sellers, but there are still a lot more buyers than sellers. So, bidding wars have returned with a vengeance — the market is leaner but still very strong.

The divergence between condo and freehold prices has continued and even widened, as a result of the government-induced decline in affordability. While freehold prices will likely remain below last year for another 3 months or so, condo prices have already surpassed the peak reached last spring. The supply of new condominium buildings continues to grow apace, but the demand is growing even more quickly.