There were a couple of reports yesterday that are sure to make the average home buyers head spin.
While the Toronto Real Estate Board announced a startling 22% drop in sales in March, RBC Chief Economist Craig Wright tells us that Ontario is on the brink of a recession which will be short lived thanks to Ontario's healthy real estate market.
So what's really going on? Is the market 'cooling down', heading for a US style collapse, or is our real estate market healthy?
One important point to be aware of is that the decline referred to in media reports has to do with sales volume, not average prices. Average prices continue to be on the rise.
Having said that, 22% is still a big decline and we should be taking a closer look at what's happening. It's easy for a lot of people to look at last month's decline and conclude that we are on track for a crash in Toronto's real estate market. But the numbers only tell part of the story. To really understand whether our market is healthy or on shaky ground we have to look beyond the numbers to understand what caused the decline in Toronto.
When it comes to the Toronto market, is supply and demand leveling out after years of imbalance? Was this decline caused by a speculative bubble bursting? Are homeowners following their US counterparts in defaulting on their mortgage payments, leading to an oversupply of properties as banks turn to Power of Sale to recover their loans? Perhaps our market is experiencing the high levels of speculation, high interest rates and high inflation that led to Toronto's real estate crash twenty years ago. There are countless factors that can trigger a decline in real estate sales and identifying the right ones in play today is key, because they don't all lead us to the same place.
So how can sales be on the decline and our market still be healthy? Again, the answer has to do with the reasons behind the decline. Unlike the US market, Toronto's real estate market was not highly speculative during its rise (the one exception may be the new condo market).
To date, Canada has not experienced the phenomena of millions of home owners defaulting on their mortgages. While some equate the introduction of new mortgage products such as extended amortization in Canada to trends in the US market which also saw the introduction of "no questions asked mortages", I feel there are very important differences - our banking industry being more conservative for one.
A couple of weeks ago I wrote an article titled Why is Toronto's Real Estate Market Cooling down where I talked about some of the factors that I believe are triggering the slowdown in Toronto's real estate market.
Most people tend to see the real estate market as either on its way up or on its way down. The reality is that there is something in between boom and bust markets. Economics 101 tells us that boom and bust markets occur when supply and demand are out of whack. When supply and demand eventually line up we reach a period where prices are neither on their way up or on their way down. They just bounce around the same range for years.
Between 1992 and 1998 the average sale price for homes in Toronto hovered around $208K. Prices would rise a bit in one year and then drop in the next but were never more than $10K (or 5%) from the $208K average for that period. During that same period, roughly 47,000 homes would sell on average each year, but exact sales volumes per year were far more variable than prices. The number of homes sold would be up or down by up to 10,000 homes (or 21%) in any given year.
If a drop in sales results in a greater balance between supply and demand, then the decrease is not only expected but also a healthy change for our market. Sales and prices may fall from their record heights, but I don't see anything in our market or economy that would suggest an upcoming crash. If anything, our market is approaching a period where supply and demand appear to be lining up and leading us to a far more balanced market.
April 4, 2008Market |