Real Metrics – May 2018

Is the bottom in? “Be fearful when others are greedy, and greedy when others are fearful.” Warren Buffet

After a short hiatus, we are back to our writing! And its a good time to be back, with the weather turning and activity seemingly heating up too! The Toronto real estate market continues to be an interesting one to observe following a year of great volatility. This month, we wanted to talk about inflection points in the market, as well as speak to the marked difference between Toronto and some of the 905 area codes – notably York Region.

In our former lives on Bay Street, one of the questions we asked during market downturns was whether the “bottom is in”? Now, comparing real estate markets to the stock markets isn’t necessarily analogous, but both markets are impacted by psychology of the participants. Many stock market observers, suggest two emotions drive the market – fear and greed. These two emotions can also drive the real estate market. This was quite evident when a greed-driven market pushed prices to unsustainable levels in the Spring of last year. Following several policy changes, fear took over, and the market quickly reversed direction. That swing in sentiment marked the inflection (or the top) in the market.

Since then, negative headlines have impacted the psychology of those following the Toronto real estate market – in some cases, pushing many would-be buyers onto the sidelines. It is our expectation that many of these would-be buyers will begin coming off the sidelines in the coming months, as stability returns to the market.

Back in November, we pointed out that March and April YoY numbers would begin to look very negative, even if we assumed prices remained flat. And as we had expected, the recent month April, year over year (YoY) numbers looked pretty bleak – transaction volumes were down 33% and average prices were down 13%. The YoY data for detached homes look even worse with volumes down 40% and prices down 14.5%. We anticipate May data to look similarly bad. So it would seem that stability in the market is still a distant reality, or is it?

Exhibit 1 shows that, while the YoY Percentage Price change (red line) will likely bottom in around April -June, the Average Transaction Price (blue line) looks like it bottomed several months ago – back in August and again in December. Since then prices have been climbing modestly. By the time August and September roll around, the YoY comparisons will begin to look pretty stable – prices and volumes should be flat, and in some cases up on a YoY basis. Why? Because instead of comparing against the peak, we will now be comparing against the trough. This is where the psychology starts to kick in, and buyers who have been sitting on the sidelines start to realize that prices have stabilized and may begin rising again. Whether this is the beginning of another cycle is still to be seen, but it’s worth noting and watching.

Exhibit 1: Year over year numbers should begin to improve by August

Exhibit 2: Market seemed to have “double bottomed” in August and December

A Tale of Two Cities

Various pockets of the GTA real estate market have remained strong – namely condos, certain geographic areas near the city core and properties in more affordable price ranges (i.e. sub $1 mm). However, areas outside of the core – particularly in York Region (Richmond Hill, Markham and Vaughan) have remained extremely weak. The contrast in the numbers is quite remarkable. We’ve highlighted the difference in the exhibits below.

We compared Toronto against York Region by examining sales, and active listings, and we compared the most recent month (April) to the historical average for April. For example. in Toronto, sales of detached homes in April totaled 819 compared to the historical average of 1,260 sales for the month. That’s a decline of 35% below historical norms. However, we have also seen a sizeable drop in listings (down 21.5%) compared to the historical average – meaning that at some point (all things equal), we should see demand and supply begin to balance out.

York Region on the other hand has seen sales volumes drop concurrently with a sharp rise in listings, suggesting that it will take a significantly longer period for this market to reach equilibrium, and thus we expect prices to remain under pressure in York Region for some time. Condos remain strong in both markets, albeit the dynamics of the Toronto market are better, as active listings remain low and below historical averages. In York region, condo sales volumes have risen, but so have listings.

Exhibit 3: Sales of detached homes in both Toronto and York Region have fallen over 30%, but in Toronto active listings/inventory have also fallen, while they have risen in York Region

Exhibit 4: Sales volumes of condo apartments remain strong in both markets; albeit, inventory is tighter in Toronto

Exhibit 5: Activity in Toronto remains healthier than outlying areas

Exhibit 6:Summary of Activity Detached Homes – April 2018

Exhibit 7:Summary of Activity Condo Apartments – April 2018

Please refer to our pdf report for more details. As always, feel free to contact us, we are happy to help!

Kindest Regards,

Jenny & Justin Wu