Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Analysing Toronto’s Real Estate Market: How Can So Many Be So Wrong?

John Pasalis in Toronto Real Estate News

Rarely does a week go by when there isn’t a new economic forecast about the real estate market. For nearly a decade, the negative forecasts have been predicting a 25% decline in house prices while the positive ones have been predicting a “soft landing” for Toronto’s real estate market. Both predictions have yet to come true.

Readers often ask me how this is possible. How can so many economists be so wrong about the market for so many consecutive years?

While there are a number of reasons why economists are poor forecasters (Nobel-prize winning psychologist Daniel Kahneman's new book Thinking, Fast and Slow suggests that most experts, like most humans, are not as clear-thinking as they'd like to be due to the way the human mind operates), I’ll focus on some of the key problems that have been top of mind with me lately.

Firstly, the real estate market has historically been the realm of the macroeconomist. Macroeconomists will study aggregated indicators like GDP, unemployment, interest rates and household income to understand their impact on the real estate market. While these kind of macroeconomic indicators are of course important and do impact the real estate market, they are far too broad to really give us a strong understanding of what’s going on in the actual market.

Even when economists look beyond national and provincial data to focus on indicators for a particular city, this too can present considerable challenges. In many instances the data economists use, through no fault of their own, is either inaccurate or misleading.

The real estate market requires a stronger emphasis on microeconomic principals if one truly wants to understand where the market is heading.  Microeconomists study the individual decisions and behaviours of households and their impact on supply and demand. More importantly, they track the spread of such decisions and behaviours, identifying the trends that really shape the real estate market.

To illustrate my argument, I’ll look at two common macroeconomic variables that economists often use when studying the real estate market - average house prices and changes in rent - and why they are problematic.

2011 Year End Real Estate Statistics for Toronto

John Pasalis in Toronto Real Estate News

The final numbers for 2011 are in and the average price for a Toronto home officially increased by 8% to $465,412 over 2010.  Sales were up 4% to 91,756 and the number of new listings were down 4% to 148,014.

But we know the aggregate stats don't tell us too much about the market so I'll take closer look at the key figures that drove Toronto's real estate market in 2011.

Inventory

The big news in 2011 was the limited number of houses that came on the market for sale between April and June, traditionally the peak months for the market.  The following chart shows the monthly inventory (houses available for sale) for the past four years.  You'll see that inventory levels between March and June for 2011 were significantly lower than previous years.

 

The following chart does a slightly better job of showing just how much inventory levels declined compared to last year.  It shows the percentage change in inventory in 2011 when compared to the same month in the previous year. The number of homes available for sale was down 27% in May.

Toronto's Real Estate Market in 2011 - Year in Review

John Pasalis in Toronto Real Estate News

As we say goodbye to another year, it's always instructive to take note of the year that was. What did we hope for? Worry about? And how did things actually play out? Here's my review of the key stories behind Toronto's real estate market in 2011.

January 

To kick off 2011 Finance Minister Jim Flaherty decided to make some changes to Canada's mortgage rules including reducing the maximum amortization from 35 years to 30 years. I anticipated that a mini boom would follow as many buyers would rush to buy ahead of the March 18th deadline (indeed Toronto's sales-to-inventory ratio climbed from 36% in January to 56% in March).

In my January market update I looked at whether or not Toronto house prices were on the way up or down by comparing figures published by the Toronto Real Estate Board and by the National Bank Teranet House Price Index. TREB reported an increase in house prices while the House Price index showed a decline in prices.

New listings and sales were down 10% and 13% respectively in January 2011.

 

February 

Economic research firm Capital Economics published a report that suggested that house prices in Canada could easily fall by as much as 25% over the next several years(in actuality, house prices increased by roughly 5% nationally and 10% in Toronto in 2011 ).

But not all economists agreed. From Scotiabank economist Adrienne Warren, “We lack the triggers that prompted the U.S. market to crash, I think what you see is prices staying flat as incomes rise over the next few years.”

RBC Economics forecasted that home prices in Ontario will rise a modest .5% in both 2011 and 2012.

Although sales were down 14% in February, my market watch for the month showed that the market was actually heating up and moving further into seller's market territory.

Toronto Real Estate Sales up 11% in November

John Pasalis in Toronto Real Estate News

Below is the Toronto Real Estate Board's press release with November's sales statistics:

Greater Toronto REALTORS® reported 7,092 residential transactions through the TorontoMLS® system in November – up 11 per cent in comparison to November 2010. At the same time, the number of new listings was up by 14 per cent in comparison to last year.

“We have seen strong annual sales growth through the 2011 fall market. The increase in transactions has been broad-based, with strong growth across low-rise and high-rise home types throughout the Greater Toronto Area,” said Toronto Real Estate Board (TREB) President Richard Silver. “The market has also become better supplied, with annual new listings growth outstripping that of sales. As this trend continues into 2012, we will see more balanced market conditions.”

The average price for November transactions was $480,421, representing an increase of almost 10 per cent in comparison to $437,494 in November 2010.

“Despite strong price growth this year, the housing market remains affordable in the GTA,” said Jason Mercer, TREB’s Senior Manager of Market Analysis. “The correct method of assessing affordability is to consider the share of the average household’s income that is dedicated to mortgage principal and interest, property taxes and utilities. Currently, this share remains in line with generally accepted lending guidelines. Given this positive affordability picture, average price growth is forecast to continue in 2012, albeit at a more moderate pace.”

John Pasalis is the Broker Owner of Realosophy Realty Inc in Toronto. Realosophy focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions. Email John

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A Closer Look at Canada's Real Estate Market

John Pasalis in Toronto Real Estate News

Teranet and National Bank publish a monthly House Price Index that tracks changes in house values in a number of Canadian cities.  They recently added 5 cities (Victoria, Winnipeg, Edmonton, Hamilton and Quebec City) to their monthly House Price Index report bringing the total number of cities tracked to eleven.

Using a simple average to measure the change in real estate values can present a number of problems.  Averages can be heavily skewed by changes in the housing stock and by a small number of super luxury property sales.  

The House Price Index uses something called the repeat sales methodology to calculate changes in house values.  This approach requires a property to have been sold at least twice in order for it to be used in their calculations.  They take the current sale price of a particular house and compare it to the previous sale price to measure the increase or decrease in value over that period.  This approach offers a more realistic look into changes in real estate values. 

Instead of reporting on prices for a particular city, National Bank and Teranet have converted house prices into a standard index.  To do this they first assign a base period, in this case June 2005, for which the index for all regions is set to 100.  The index then captures just the appreciation or depreciation in house values for a particular market. 

Let’s take a closer look at the House Price Index data for al 11 cities tracked by the index. I’ll discuss each city in order of their appreciation as measured by the index.

Winnipeg is Hot!

Winnipeg house prices have appreciated at a faster and more consistent rate than any of the other Canadian cities tracked.  House values in Winnipeg have increased 78% since June 2005 (the base year of the house price index), roughly 12% per year.  Even a global economic and credit crisis in 2008 wasn’t enough to slow down Winnipeg’s real estate market.  During that time house values declined by just 3% before resuming their upward trend again.

Toronto Real Estate Roundup November 25th 2011

John Pasalis in Real Estate Roundup   

Toronto Condo Bubble: The Industry Weighs In

There has been a lot of talk about a bubble in Toronto's pre-construction condo market lately. 

Today we have the pleasure of reviewing several articles from people actively involved in the condo market who are challenging the idea that Toronto's condo market is looking like a bubble. Some of the arguments are more weighty than others, but all are worth a read.  

I'll take a look at some of these arguments next week and will see how they stack up against my own thoughts on the market.

 

Are new condos overvalued compared to resale units? (Toronto Star)

Why we're not in a condo bubble (New Condo Guide)

A condo bubble in Toronto? Forget about it, says Urbanation's Ben Myers (BuzzBuzzHome)

Are there too many condos in Toronto? (BuzzBuzzHome)

 

More Condo News

Time to Give Resale Another Look? (True Condos)

Cap Rates and Condos (True Condos)

Top 10 Tallest Condos in Toronto (Talk Condo)

City plays Donald Trump—Doug Ford gets excited, Adam Vaughan is not enthused (Toronto Life)

City to partner with Tridel in 75-storey waterfront condo (Globe an Mail)

 

Are Canadian House Prices Overvalued?

Will the hammer drop on house prices? (Globe an Mail)

House of horrors, part 2 (Economist)

Top 10 property safe havens abroad (The Telegraphy)

Housing affordability improves slightly (680 News)

Where Housing Affordability Stands in Canada (RBC)

 

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Toronto Real Estate Market Statistics - October 2011

John Pasalis in Toronto Real Estate News

TREB released their monthly sales figures last week and overall the market continues to show signs that we are moving closer to a more balanced market ahead.

Sales were up 14% over last year, a drop from the 21% increase we saw for each of the previous four months.

The number of new listings coming on the market was up 17% which pushed the overall inventory to just 3% below the same month last year.

Troubling Signs for Toronto’s Condo Market

John Pasalis in Condo Buying, Home Buying, Toronto Real Estate News

If there’s one thing that concerns me about Toronto’s real estate market it's the uncertainty about the boom we are seeing in the pre-construction condo segment. 

As Toronto’s pre-construction condo market continues to break sales records I wonder when this boom is going to run its course.  Over the past few months, my concerns regarding the longevity and stability of this construction boom have heightened as a result of several observations. 

Supply

Toronto has more condos under construction than any other city in North America. Toronto currently has 132 high rise condominium buildings under construction compared to 88 in Mexico City and 86 in New York.

Toronto Economic Development Committe - October 2011

If that wasn’t enough, Toronto is going to see 70+ new condominium projects launch this fall alone, more than double the number of condo launches during the same time last year.

As long as investors are buying builders will continue to flood the Toronto market with new condos. Given that most investors are going to try to sell their units after these condos are completed, is there going to be enough demand from end users to maintain a balanced market?

Conditions Improve for Toronto Home Buyers

John Pasalis in Toronto Real Estate News

Since June of this year Toronto's real estate market slowly started to move away from being a strong sellers market to one that is becoming a bit more balanced. But only recently have I started to see the effects of this shift more consistently across the market.

The most obvious sign of this change is that fewer houses are getting multiple offers. When a house is listed for sale in Toronto the listing agent will typically set an offer date roughly one week after the property has been listed for sale.  The goal of setting an offer date of course is to try to generate multiple offers for your client.  

In many cases agents will underprice their client's house - list a house that is really worth around $530K for $499K - as a "strategy" to generate a bidding war.  The idea is that you'll get more buyers competing for the hosue because many will see it as a bargain relative to other properly priced homes in the neighbourhood.  While this approach might work well when we're in a strong sellers market, the strategy can backfire as the market cools down.

Over the past few weeks I've seen this strategy backfire on many sellers when their offer date comes and they find that there are no buyers willing to make an offer.  So what is a seller suppose to do now that they listed their $530K house for $499K and got no offers on their offer date?

We are actually starting to see many sellers increase their list price after their offer date. In the above example the seller would likely have to increase their list price to around $540K if they want to end up with $530K.

Under pricing houses is a lazy strategy in the best of times and a foolish one when the market slows down.  The average Toronto buyer does not understand why sellers increase their price after they don't get any offers on their offer date.  They don't understand why they should pay $530K for a house when the house didn't get a single offer when it was originally listed for $499K.  

Toronto's Hottest House Type Is.....

John Pasalis in Toronto Real Estate News

One of the major misconceptions most buyers have about the real estate market is that changes in supply, demand and most importantly price happen uniformly across the country and even across a particular city.  That's why most buyers get a bit concerned when they read forecasts that Canadian house prices are going to decline by 10%.  They assume that a decline of 10% in house values across Canada means my house in Leslieville is also going to decline by 10%.

Regular readers of this blog know the real estate market really consists of a bunch of tiny micro markets each with their own factors that influence changes in supply, demand and price.  Even within the same city we can see wildly different conditions from one neighbourhood to the next.  

Today I want to show how these same ideas can be extended not just to different neighbourhoods but even to a particular type of housing.  In the same way the demand for homes can vary from one neighbourhood to the next the demand for a particular type of house (detached, semi-detached, townhomes, condos and condo towns) can vary across the city.

I turned to TREB's August sales report to see which house type is the hottest in the city of Toronto.  I based my analysis on three key metrics from the report.

Days on Market: The faster homes are selling, the higher the demand for them

The following chart shows the Days on Market by house type.

 
We can see that townhomes are selling the fastest at 19 days followed by semis at 20 days and detached houses at 21 days.  The days on market jumps up to 32 days for condos and 28 days for condo towns.