June 2017 Real Estate Update

Stand-off: Buyers and sellers expectations remain apart

The stand-off between buyers and sellers carried over in to June. Buyers are looking for deals or waiting for prices to head lower. Meanwhile, sellers continue to expect peak or near peak prices and are trying to hold firm. Clearly, there is a disconnect and the result being fewer transactions and an increase in active listings. The market is attempting to find equilibrium, and we are likely to see continued pressure in the near term until that equilibrium is reached.

Nevertheless, we see this as a pause in the marketplace, as opposed to a start of a longer term decline. The underlying fundamentals remain relatively unchanged. Economic conditions in the GTA remain sound with continued job creation and household formation/population growth – these are key to longer term growth of the housing market. Last week, employment data was released showing continued job creation – Ontario’s unemployment rate fell to 6.4%, slightly better than the national average at 6.5%. And population growth, as we have discussed in our past write-ups has been strong in the GTA region – increasing 523k or 8.3% in the past five years. Forecasters predict population in the GTA will grow 1.139 million or 16.7% over the next 10 years. We expect this to support continued growth of the GTA housing market over the longer term.

Figure 1: Strong population growth a key driver for long term housing growth

Transaction prices fall from May levels – condo market remains healthier

Average detached home prices fell 7% in the GTA from May levels, and fell 12.4% from the peak in April. On a year over year basis, prices are still up 8%, but clearly quite different from the unsustainable 30%+ growth rates that we saw earlier in the year. Nonetheless, 8% growth is more inline with historical trends – for example, over the past 10 years average annual price growth in the GTA was 7.5%, and over 20 years was 6.7%.

Condo prices, on the other hand, have held up relatively well with a 2% drop from May and 4% drop from peak April levels. We believe the lower price point, relative affordability and lower inventory levels of condos are the reasons why prices haven’t fallen as much as detached homes. We expect these relatively more favourable conditions for condos to continue through the balance of the year.

The difference between the detached housing and condo markets is quite stark. Inventory of detached homes has spiked to a 9-year high in the GTA, an increase of 119% from this time last year. Meanwhile, condo listings have fallen to a 15 year low (for this time of the year), and a 24.6% decrease from last year.

Figure 2: Summary of Activity: June 2017 – Detached Homes

Figure 3: Summary of Activity: June 2017 – Condo Apartments

Bank of Canada expected to increase interest rates

Bank of Canada governor, Stephen Poloz and members of the central bank will be meeting this Wednesday (July 12) to discuss the state of the Canadian economy. The expectation is that the Bank will raise its overnight lending rate by 0.25%. Keep in mind that the current Bank Rate is only 0.50% which are historical lows. These low rates have persisted since 2009. So interest rates need to normalize to avoid speculative behaviour or asset bubbles whether in financial assets, real estate or otherwise. In our minds, a 0.25% increase in interest rates off historical lows is a relatively benign concern. We recall our parents telling us stories of 17% interest on their mortgages in the 1980s. So some perspective is needed.

Where is the market heading? Will foreigners return to the market?

Trying to predict the future can be a mug’s game and we can never pretend what the future holds. However, based on history and market fundamentals we can draw a picture of what it could potentially look like. The last meaningful downturn in the housing market occurred in 2008-2009. Clearly, the economic conditions are different today – we are not currently in a recession nor have there been any major global financial shocks, interest rates are at historical lows, and employment continues to grow. So, this is just an illustration. During that period, average transactions prices peaked in Dec. 2007 and bottomed out 13 months later in Jan 2009 – falling 18%. Prices began to rise, and within 9 months surpassed the previous peak.

In the current market, average transaction prices have already fallen 12-13% from peak March/April levels. We anticipate further softening in the near term, as weaker seasonal sales (summer holidays) and higher listings pressure the market. However, based on current economic conditions, we anticipate a quicker recovery this time around (barring any unforeseen events). Anecdotally, we see some cases of motivated sellers, however for the most part we do not see panic among sellers in the marketplace, only a readiness to sell if the price warrants.

We would also point out that foreign investors that have backed away due to the 15% non-residency tax may re-engage in this market given the pullback in prices. For many global real estate buyers, Toronto remains an attractive market due to its strong rule of law, cultural diversity, more open immigration, good education system, infrastructure and healthcare. In addition, relative to many other markets, real estate values in the GTA remain comparatively low – we illustrated this in our March 2017 newsletter. For example, we estimate condos in prime locations in Toronto command approximately $797/sqft compared to $2,042/sqft in Los Angeles, $2,111/sqft in Sydney, $2,707 in Shanghai, $4,151 in London, and $4,790 in NYC.

Naturally, trying to time the market is difficult, real estate is a long term game and will go through cycles but those that have stayed in the game have fared well.

As always, feel free to contact us if you have any questions regarding the contents of this update or about the market in general.

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