Answering The ‘Tough Questions’ About The 2018 Real Estate Market
TorontoRealtyBlog
Maybe I wasn’t issued a formal challenge last Wednesday, but perhaps I saw the opportunity to give myself one, and rise to the occasion!
Either that, or my O.C.D. was in over-drive this weekend, and I wanted to spend hours pouring over statistics.
For those of you that don’t think enough “tough questions” are being asked, and answered, about the 2018 real estate market thus far, let’s change all that this morning…
If you’re a regular reader of Toronto Realty Blog, and a regular reader of the comments, you’ll probably recognize the usual cast of characters.
Over the last eleven years, I’ve seen a lot of reader/commenters come and go, and demonstrate different levels of activity.
I’m sure you all have as well.
As much as I’d like to give a shout-out to the top handful of active commenters right now, I’m more afraid of missing somebody – and hurting somebody’s feelings! Oh, how 2018 of me…
So instead, let me simply make mention of the comment from last Wednesday that I want to address.
Long-time, and very regular reader, Ralph Cramdown, posted something that caught my eye:
Nobody’s talking about the ongoing fallout from last spring.
At first, I made nothing of it. But the more I thought about it, the more I wondered how much I had talked about last spring on TRB, or at least compared this year to last year.
Or even worse – that perhaps by not writing about it enough would make me guilty of cheerleading, or being biased, or pulling the old “nothing to see here, folks” as many other agents have done.
I went back and read through the 35-40 posts so far this year, and realized that while we’ve discussed this year compared to last year, or how crazy last year was, etc., we haven’t really dedicated a specific post to asking the “tough questions,” as a colleague of mine put it last week.
So I tried to put myself in the shoes of an onlooker, and ask the questions they would ask, if they knew they wouldn’t get political rhetoric from somebody trying to put an eternally-positive spin on things.
This is what I came up with:
1) Where are we in the market?
2) What is the media saying about the market?
3) What do the numbers say?
4) What do the numbers not say?
5) Has there been any “fallout” from the new mortgage regulations?
6) What would happen if interest rates increased again?
I’m sure we could do this all day, but off the top of my head, and generally and broadly speaking, I have to think those are the topics, and questions, most folks would ask.
So let’s answer them one-by-one…
1) Where are we in the market?
This is a very broad question, but as I said – if you wanted these questions answered honestly, then you can be broad, and expect the response to cover all the angles.
Where are we in the market then? In terms of price, activity, comparisons to last year (or next year), and geographic differences?
The “spring” market is essentially six months long, from January through June. It’s usually divided in half by the slower second-half of March, during which we see various Spring Breaks (public school, private school, specialty school), followed by Easter & Passover. Once we get over that hurdle, the market continues right through to the end of June, only slowing around Victoria Day long weekend.
So with the first three months of the year in the rear-view window, we’re about to see activity pick up substantially, as new listings always increase in April, May, and June.
But “where are we in the market,” broadly asked, really depends on exactly where you’re looking.
The story so far in 2018 has been the massive discrepancies in pricing and activity between the 416 and the 905. And that will be a big theme as I move through the next five points.
With the March TREB numbers now released, let’s get the big shiny number out there: 14.3%.
That’s how much the average home price has dropped, year-over-year. That’s the GTA-wide price, 416 and 905 together, all home types.
The other big number: 39.5%
That’s how much sales have declined, year-over-year, in the month of March.
Say what you want about the market, certain pockets, price points, or property types, but there’s no denying that very broadly speaking, we can say, “The market is down.”
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2) What is the media saying about the market?
This is important, whether you see it or not.
Every client I’ve ever had, buyer or seller, 2004 or 2018, has asked me about a particular headline, newspaper column, or media sentiment.
We might not realize how affected we are by what we see. Even scrolling past stories you don’t read on your Facebook feed, you’re still seeing the headlines, subconscious or conscious.
Now I have a theory that I’d like to share, and tell me if you agree.
People in 2018 don’t really read anymore. They swipe. They like. They comment.
In order to sell newspapers, or at least online subscriptions, headlines have to be more catchy, and thus often have to be more negative, exaggerated, or exacerbated.
And that’s why we’re constantly seeing the media use the worst statistic they can find with respect to the Toronto real estate market, which last month was the 39.5% decline in March sales, year-over-year.
A headline reading, “Toronto market down almost 40%” is catchy! But it’s just a headline, and how many people actually click on the story, and read further? Maybe…..5% of all the people who see it?
“The market” isn’t down 40%. Sales in the GTA are.
And while I don’t blame any media outlet for the headlines they write, since I’d probably do the same thing in their position, I think the mantra “if it bleeds, it leads” is important to keep in mind when using headlines to measure the market.
When the TREB numbers came out last week, the headlines looked like this:
“Toronto Home Prices See Biggest Drop In Almost 30 Years”
“Real Estate Sales And Prices Tumble In March”
Of course, there are positive headlines too, just to show both sides of the coin:
“Toronto Real Estate Market May Be Poised For A Spring Rebound”
“Toronto Home Prices Rise For A Third Straight Month, Showing Signs Of Rebound”
As for that latter headline, I’ll show you why that’s important as we move forward.
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3) What do the numbers say?
The most commonly-used statistic is the “Toronto Average Sale Price,” so let’s take a look at that:
Wow! Look at the red ink!
14.4% and, yes, I’m off by 0.1%, but the TREB numbers change historically all the time, so my 2017 numbers aren’t in line with the 2018 numbers. March was off by a grand. I wonder why that is?
Anyways…
14.4% or 14.3%, it’s still a big number.
Does that mean that every buyer who purchased a home in March of 2017 has lost 14.4% of the value of his or her home?
No, of course not. But that won’t stop headlines, and that won’t stop the perennialrenter who works in the cubicle next to you from constantly berating you for buying a house last year.
But what if we look at all property types? What else do the numbers say?
Interestingly enough, the most strength in the market is found in the condominium sector, specifically in the 416:
Already this year, the average condo price is up 8.6%, on paper, at least.
And this is the only segment of the market where the March, 2018 price is higher than the March, 2017 price.
As for the freehold market, here’s how Semi-Detached and Detached in the 416 look:
The average semi-detached home in Toronto is only down 5.3%, on average, year-over year. That’s dramatically lower than the 14.4% Toronto average.
But the detached numbers are huge!
A 17.2% decline, and that’s 416, – not GTA. So if you’re looking for me to make the argument, “Don’t worry, almost all of the decline took place in the 905,” I’m not going to.
I would argue, anecdotally, that a $2,000,000 house purchased in, say, North Toronto, back in April of 2017, is not worth $1,656,000 today. Not even close. I won’t have that argument.
But I will accept, again – anecdotally, that a $2,000,000 detached home purchased in April of 2017 in, again, North York, is not worth $2,000,000 today.
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4) What do the numbers NOT say?
That question is an invitation to “make numbers say anything you want,” but I think it runs deeper than that.
There are a lot of numbers that TREB doesn’t publish, and it bothers me. They divide the 416 and the 905, but then they do so with Semi, Row, and Detached – but not simply “freehold.”
Then if we wanted to look at a smaller geographic area, there’s simply not enough volume to take an average, and compare it to last year.
There have only been 28 sales in all of C11 so far this year! That’s nine per month, including all of semi-detached, rowhouse, detached; high-end, low-end, and in between. How can you draw any conclusions about what a $1,000,000 or a $3,000,000 house are worth today, compared to this time last year, when you have no volume of sales?
So here’s what I did – I got creative.
I looked at the east side, since that’s where most of the action was last year, and most of the action has been this year, and I combined all the sales for January, February, and March, in E01, E02, and E03.
I used a weighted average for Rowhouse sales, Semi-Detached sales, and Detached sales, since, again, TREB doesn’t give us the numbers we want.
Sales are down so far this year – 6.7% in February and 13.5% in March. Not quite in line with the 39.5% decline we’ve seen on average in the GTA, but important to note regardless.
The price is where things get interesting, and let me go off on a tangent here for a moment.
When I price a home for a prospective seller, I use my “gut” feeling first. I write that number down, and then I complete a Comparative Market Analysis. While the “gut” feeling is 100% subjective, a CMA has a lot of subjectivity as well, as you make adjustments for things like a bedroom, bathroom, garage, finished basement, etc.
So far in 2018, my “gut” feeling for just about every single home I’ve toured has been higher than what the CMA says.
When discussing a west-side home with buyers last week, I surmised that perhaps the home in April of 2017 would have cost 1-4% less. That’s not in line with the 14.4% GTA average decline; not even close. But again, the “gut” plays a factor, as does the location.
So back to the E01, E02, E03 numbers now, specifically the price.
It’s interesting to note that while the average home price in the GTA has lost 14.4%, the east-side has only lost 0.9%.
This is a small sample size – only 200-some-odd homes. But is it fair to say that maybe adding 2% to each side – and saying home prices are somewhere between -3% and +3% from last year?
I think that’s quite reasonable.
So in my “what do the numbers not say” answer, I’d say that geography is playing the biggest factor so far in the 2018 market.
As you’ve heard, most of the weakness in the market has been in Durham, York, Halton, and Peel.
One last statistic to provide you with – the monthly increase/decrease in average home price. I specifically left it out of the chart in Point #3 because the market bears and the media aren’t using it, even though it’s important in the short-term context of the market:
To be fair, in the “where are we in the market” conversation, as well as “what do the numbers not say,” you have to look at the monthly numbers.
So far this year, we’ve seen monthly increases in average home price in January, February, and March. And while you’re always going to see a monthly increase in January, since December is such a slow month, there are a lot of folks who predicted the “fallout” from the B20 regulations would crash the market in January, and that didn’t happen.
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5) Has there been any “fallout” from the new mortgage regulations?
Unfortunately, I don’t have any statistics for this point, so I’ll have to use anecdotal evidence once again.
I did a couple of interviews – one in the fall before December 31st asking, “Do you have any clients looking to hurry-up and buy,” and one in the spring asking, “Have any of your clients been forced to the sidelines because of the new B20 rules,” an both times, my answer was no.
But in the past month, I’ve had three clients all tell me they were impacted in one way or another.
One buyer-couple was pre-approved for $1.2M before December 31st, and they were capped at $1.1M in our search. They ended up buying for just over their $1.1M number, dipping into some savings they didn’t want to use in order to get the house they really wanted.
Another couple who started their search last fall have yet to purchase, and while I don’t know their specific numbers, they’ve told me that their purchasing power is weaker than during our search last year.
And one would-be condo buyer told me in an email, “I’m F*****,” in reference to his ability to purchase, or should I say, inability, since he no longer qualifies for an amount that would allow even the purchase of a bachelor in Liberty Village.
I think it’s fair to say that people are affected by the new lending rules, but I would offer that the impact hasn’t been felt nearly as much as some figured it would. I will tell you who has not been affected at all, and that’s overseas buyers who purchase in cash. Gee, I wonder why the government decided to punish hard-working Canadians, and yet they continue to allow offshore money to flow freely. Ralph?
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6) What would happen if interest rates increased again?
My first mortgage rate was a 5-year fixed at 4.99%.
We’re still quite a ways away from those days returning.
But if rates were to go up again, twice, 25-basis-points each time, I think the lower-end of the market would cool.
And you know what? That’s probably a good thing, since the lower-end of the market is the hottest part of the market in 2018 thus far.
$1,000 per square foot is the new normal for downtown condos, and it shows no signs of stopping.
If interest rates increased substantially, both the investors purchasing $500,000, 1-bedroom condos to rent out, and the first-time, entry-level buyers who just qualify to purchase, could see their affordability, and desirability, weakened substantially.
And another part of the market that would suffer, one which is seldom talked-about, would be the multi-unit sector.
Cap rates have continued to decrease throughout the central core, from a 5% standard years ago, to as low as 3%. Cap rates, of course, are calculated based on the sale price of the property, so it goes without saying that buyer demand has a hand in setting prevailing cap rates.
But when interest rates increase, accepting a 3% cap rate becomes less desirable. And as rates increase, so too should cap rates, meaning property values decrease accordingly.
I’ve seen some exceptional 4-unit properties sit on the market this year for far longer than they should, or at least would have last year, and I have to think it’s due to increased rates.
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So there you have it folks.
A few questions that are being asked in real estate circles, and my best attempt to answer them in an unbiased fashion.
I try my best to read the comments every day, but often don’t get to a lot of the questions.
This time around, if you have questions – please ask. If they’re statistical in nature, I’ll do my best to set aside some time to get to them.
Happy Monday!
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