Why sales and prices seem likely to continue to decline for at least the next two or three months
It’s official: After a long period of extraordinary home sales and house price growth, the Toronto Real Estate Board (TREB) reported that the Greater Toronto Area housing market posted the first set of declines of this year into May for a market that has been hot for at least the past two years. But will it be a one-month halt, or a turning point followed by falling prices and sales in the months to come?
Predicting the performance of the real estate market is tricky. But a closer look at the TREB data seems to provide enough support for a reasonable call: sales and prices will continue to decline for at least two or three more months.
In its press release, TREB says home sales in May 2017 were 20.3% lower than the same month last year. It was a second consecutive month of declining sales, as in April 2017 sales fell 3.2% year-on-year. Sales of single-family homes fell 26.3% in May, while sales of condominiums fell 6.4%.
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At the same time, the supply of new home ads continued to increase, rising 33.6% in April, then 48.9% in May.
As any Economics 101 student will tell you, when supply goes up and demand goes down, prices are doomed to go down. Indeed, the average price of homes sold in the GTA fell for the first time this year by 6.0% in May compared with April.
Analysts who follow the market often assume that the main reason for the trend change in May was the package of measures to cool the “overheated” GTA housing market as announced by the Ontario government. in April. However, a closer look at the statistics from TREB suggests that the cooling trend started earlier. This is well illustrated by an underestimated indicator which is however traditionally a good predictor of future sales and prices: the ratio of sales to new listings, i.e. the ratio of demand to and supply of housing. .
If the ratio, expressed as a percentage, is, say, 40 percent, that just means that in any given month there are 40 sales for every 100 new listings. Traditionally, a ratio between 40% and 60% is considered a sign of a âbalancedâ market, while a ratio above 60% indicates a âsellerâ market. This ratio reached a record high of 81.5% in the GTA in February 2017, a figure well above the market breakeven point, and which gave sellers a clear and solid advantage over buyers in the process. sales negotiation.
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However, over the following months, the sales-to-new listings ratio declined, first to 70.8% in March, then to 53.8% in April and finally to 39.5% in May. This represents a clear and steady downtrend that cannot be ignored. Even if this ratio starts to gradually increase over the next summer months, which is far from likely, as buyers are expected to remain skeptical for more than a month, it will most likely remain in the “balanced” range of 40 to 60%. This suggests that, at least for the next few months, there will be continued downward pressure on home prices.
Whether this pressure continues into the fall and becomes an extended trend is a critical question to which we do not yet have a well-founded answer. But at least one thing is clear: the bidding wars in the GTA will come to a halt, at least for the next few months. To paraphrase Alan Greenspan’s famous phrase referring to the dot-com bubble of the late 1990s, the âirrational exuberanceâ of home price growth in Toronto is now halted. This is good news for the Toronto real estate market. This is our best hope for a so-called soft landing, as opposed to a hard landing or “crash” of a clearly overheated Toronto real estate market.
Novak Jankovic is an economist and consultant with over 20 years of experience in the housing and mortgage finance markets.