April 2017 Real Estate Update
Prices continued to rise in April but is the market heading towards rebalance?
Wow, what a month it was. Following the dramatic price moves in March within virtually every GTA market, a number of events threaten to slow the market, although this hasn’t manifested itself fully in the April numbers. Prices continued to rise in April and hit new records. Average sale prices for detached houses in Toronto and York region increased 25% in April and hit new records.
Markets seem to be moderating but this could be a short term trend
We see some moderation occurring within the frenzied market that was January , February and March. We believe the Provincial governments’ policy changes had many buyers stepping off to the sidelines through April, either waiting for more clarity or just anticipating better prices down the road.
Overall transaction volume declined (especially in York region – down 19%), and conversely listings rose dramatically. Interestingly, the bulk of the transactions in April occurred in the first half of the month (which incidentally included the Easter weekend) in advance of the province’s housing announcement which occurred on the 20th. In Toronto approximately 55%, and in York region 58% of the transactions occurred in the first half of April. After the announcement, activity appeared to have slowed.
Fair Housing Plan and Home Capital Group news put a damper on the market
The Ontario government, in an effort to demonstrate its willingness to control the market, introduced its 16 point Fair Housing Plan including a 15% foreigners tax – we are skeptical if there will be much long term impact from these policies but believe there has been some impact in the near term
In addition, the Home Capital Group (HCG) saga blew wide open following the firing of its CEO and the investigation by the OSC – stemming back two years when a large number of its mortgage brokers were dismissed for falsifying mortgage applications. But the big news came later in the month when the company indicated it needed emergency loans to shore up its balance sheet due to a run on its deposits (i.e. investors were pulling out their high interest savings deposits and GICs). The redemption of these deposits could quickly lead to insolvency.
HCG is one of the largest non-prime and uninsured (read lower quality) mortgage lenders in the country. Our conversations with mortgage experts indicate that getting a mortgage from alternative lenders just got harder and more expensive. How this will play out is still up in the air, although we anticipate regulators will want to see quick resolution to avoid any contagion to other parts of the lending market. Already there have been rumours that several large institutional investors are kicking the tires to buy HCG’s loan book. We wait and see.
Inventory or Active Listings has increased significantly
Lower transactions volumes combined with a seasonal increase in new listings has resulted in a spike in active listings. Anecdotally, we hear and see many listings not selling on offer date – which was a typical occurrence in prior months. A couple metrics we follow include sales-to-new-listings and months of inventory point towards a market that may be transitioning from a sellers’ market to one that is more balanced.
Whether this transition is a short term phenomena or a longer term trend is still to be seen, although we are leaning towards the former. For one thing, the underlying structural issues with supply in the GTA and GGH remain unchanged and constrained, as we discussed last month (re: the Places to Grow Act). On the demand side, while inventory is up, migration/immigration continues to drive population growth, economic conditions remain healthy, low interest rates prevail, and a weak Canadian dollar will continue to draw increased demand for housing in the GTA. Eventually, we see buyers coming back to the market. In the interim, however, the market will need to adjust somewhat to absorb the increase in inventory.
Sales to New Listings Ratio
Sifting through the data of all the neighbourhoods provides additional insights on which -markets are experiencing slower activity. Not surprisingly, the areas that had experienced the greatest run-up in prices in recent months and years are also now seeing the greatest growth in inventory (listings), and weakest sales data. We highlight Richmond Hill, Markham and Vaughan in York region and Willowdale and Newtonbrook in Toronto, as markets where the price growth has been the strongest over the past five years and are currently seeing the biggest decline in the sales-to-new-listings ratios (SNLR).
Take Richmond Hill, as a case in point. Since 2012, Richmond Hill has been one of the strongest performing markets, where the average detached home is up ~121%. It is also currently the market with the biggest decline in the SNLR (down 43% from 2016). In April, sales volumes fell 37%, while new listings increased 35%. This trend was already starting to show up back in March but has since accelerated. The sales-to-new-listings ratio has fallen to 0.36 (from 0.71 in the prior 12 months). A value above 0.6 typically suggests a seller’s market and a value below 0.4 suggests a buyer’s market. Active listings are up 79%, and are at their highest level since 2014. So this is a pretty dramatic swing and may suggest frothiness in these markets. Still, one month does not a trend make, so this exercise is somewhat academic, but nonetheless worth observing and tracking.
Interestingly, despite this, prices continue to be robust in all of these markets indicating sellers are not desperate and therefore unwilling to drop price.
Exhibit 5: Detached Homes – which markets may be seeing the biggest slowdown?
As always, feel free to contact us if you have any questions regarding the contents of this update or about the market in general.