Real Metrics- January 2020 Edition

Will the condo markets repeat the price surge of 2016-2017?
January 2020

Average transaction prices in the GTA were up 4% in 2019 (all home types). Detached homes showed modest price growth of 0.9%, while condos rose 6.7%.For months we’ve been seeing a steady rise in prices in the GTA. This has been particularly true in the condo markets. Inventory is extremely tight at less than 2 months of inventory. While condo listings have been low for quite some time, we’ve noticed its worsened in the past several months. As of Dec. 31, there were only 1,660 active condo listings in all of the GTA. To put this in historical context, we would have to trace back 19 years to Dec 2000 for a point in which condo listings were that low. Anecdotally, we are seeing an increase in bidding wars which is an outcome of very tight markets – in one case for a client, we competed against 17 offers!

In exhibit 1, we graphed the sales to new listings ratio (SNLR) against annual price change for condos in Toronto. SNLR is a common measure of demand vs. inventory levels, the higher the ratio, the stronger the market is. A rapidly rising SNLR is often a predictor of rising prices. We highlighted several periods of time. In each period, SNLR started to rise rapidly which was followed by a sharp increase in prices – usually lagging several months. During 2016, inventory tightened substantially resulting in a surge in the SNLR which was then followed by a big upswing in pricing. Over the past few months , the data is showing remarkable similarities to 2016. Unless there is a concurrent growth in listings, the likelihood of rapidly rising prices for condos is growing as we approach the Spring.

Exhibit 1: Sales to New Listings vs. Price Change – Condos

Capital Flight to Safe Havens

The world is experiencing great unrest and uncertainty including the US-China trade tensions, the Hong Kong protests and more recently the violence in the Middle East. All of these create uncertainty for financial markets. It is no surprise then that capital flight from unstable markets has or will increase. Capital tends to flow to regions and markets where it will be treated best on both an absolute and risk-adjusted basis.

Already, the unrest in Hong Kong has resulted in capital outflows to safer capital havens such as Singapore, Australia, the US and Canada. According to the Bank of England, capital outflow from HK has reached US$5 billion. Vancouver and Toronto likely see the lion’s share of the capital flows that is destined for Canada. Given the large diaspora of Hong Kong Chinese in Canada, the transition of this capital should be relatively seamless and could occur quickly. This demand could put upward pressure on prices and further tighten up supply.

Higher end markets are showing some recovery

Exhibit 2 shows that buyers with higher budgets (i.e. above $1.5 MM) are returning to the market. Following the foreign buyer tax and tighter mortgage rules, the luxury end of the market contracted significantly – down between 10-15% in 2017 and approximately 40% in 2018. In 2019, those markets showed some recovery with properties above $2.0 mm rising 11%, while properties between $1.5 and 2.0 mm rising 29%. To be sure, much of the improvement was the result of an easy comparison given 2018 was the low point in the market. We expect markets in the $2.0+ MM range will likely take another year to show a fuller recovery given the higher levels of listings/inventory.

Exhibit 2: Sales Volumes by Price range

Exhibit 3: Summary of Activity by Region and Property Type – December 2019

Exhibit 4: Summary of Activity: December 2019 – Detached Homes

Exhibit 5: Summary of Activity: December 2019 – Condo Apartments

As always, feel free to contact us, we are always happy to help!