Every time we see a slight slowdown in the real estate market I find our agents get many of the same questions from our clients:
Why didn’t this house get multiple offers? What’s wrong with it?
Why are some houses still for sale 2 weeks after they went on the market?
Is the real estate market going to crash?
Toronto’s market has been so competitive this year that many buyers assume that it’s normal to see virtually every home get multiple offers and some with even 10 or more offers on their offer night. The reality is that the intense competition we saw earlier this year and the slow down we are seeing today are just part of the mini cycles we regularly see in the real estate market.
When most people hear the words real estate cycle they typically think of the big overarching trends in the market, mainly booms and slumps. We think of Toronto as being in a boom phase while the US market is currently in a slump.
The fact is that during both boom and slump periods in the real estate cycle it’s common to see mini cycles (mini booms and mini slumps) when we see short term shifts in the balance between supply and demand.
As I’ve discussed in previous blog posts, one of the best ways to measure the balance between supply and demand in the market is by looking at the sales-to-inventory ratio. This is a ratio of the number of homes sold in a given month divided by the number of homes available for sale at the end of the month. If five houses sold out of ten available for sale we have a sales-to-inventory ratio of 50%. Similarly if 1 house sold out of ten available for sale we have a sales-to-inventory ratio of 10%. From a home buyers perspective a market where 5 out of ten homes are selling would be a far more competitive environment than one where 1 out of ten homes are selling. You can read more about the sales-to-inventory ratio here.
The following chart shows the sales-to-inventory ratio for the Greater Toronto Area over the past twelve years.
The first thing you’ll notice is that during the past 12 year boom period we have seen a number of short term peaks and valleys in the cycle. These peaks and valleys are the mini booms and slumps we regularly see in the market when the balance between supply and demand changes.