What Bubble? Toronto Real Estate Prices Moderating

Contributed by Darryl Mitchell. Managing Broker, REMAX Professionals Inc. Brokerage.


“Lots of talk but no reality,” states RE/MAX Professionals Inc. Managing Broker Darryl Mitchell on the trends in Toronto real estate.


There has been a lot of discussion on the potential of a drop or “bubble” in the Toronto real estate market. Considering all of the negative potential of our global economy it stands to reason that some might bring up the topic of a dramatic fall in our home prices in Toronto or in Canada. The reality shown from many local sources is not holding this to be a true picture of what is happening in our market.


Yesterday the Toronto Real Estate Board June Market Watch stated what many Realtors in the trenches already knew, the market was trending to a balanced situation. This is a normal trend after two distinct market periods, the recession or 2008 and 2009, and the recovery of 2009 and 2010. Although the average price for a home in June 2010 had climbed 8% year over year from $403,972 to $435,034, the number of homes sold had dropped fully 23% from last year’s numbers. Obviously from this slower sales pace and higher sales price, something was happening, but what? This is not indicative of a bubble where prices and volume go together to a lower level.


(See July 5 Post GTA REALTORS® Report Monthly Resale Housing Figure..)


The Terranet Home Price Index is calculated by taking the same home that has been sold at two or more different times and comparing the price increase or decrease to other homes. It is a great tool to see what is actually happening in a changing market. The momentum of a market is calculated very effectively with this Index method. Although the index has not been yet released for May and June, the April index shows the strong momentum that is leading the market forward.


( See July 1, 2010 post Terranet Home Price Index Shows Monthly price rise of 0.8% in April)


In April for instance there was a .8% increase in home values month over month in the Greater Toronto Area. With the increased price of the Toronto average in May and June we can easily assume this index will either flatten of more likely go up. This is again the opposite of what we would expect if we had a bubble ready to burst.


The recession created a huge number of unfulfilled expectations from buyers who wanted to buy a home but felt the time was not good. The uncertainty in the economy simply made purchasing a home risky, or so they felt. This uncertainty, once removed, brought many of these buyers to the market in droves, filling this pent up demand and increasing used home sales dramatically. Thus prices increased, sales increased and the flurry of activity that resulted lead to a Seller’s Market place.


Why should this change now? Well there are a number of very important and other less important issues that are influencing our market today. These can be described as long term and short term and even seasonal influences.


The long term influences are the affordability of a home and the economic environment of the Toronto area. Affordability has come down for the new home owner but only slightly. In June the long awaited mortgage interest rate increase occurred. With the economy fully stimulated by our Federal and Provincial governments, it was felt a cooling in the real estate market was in order. Thus a small, .25% mortgage interest rate increase was affected by the Bank of Canada and the major lending institutions..


As well, affordability was impacted on July 1, 2010 with the infamous Harmonized Sales Tax (HST), Ontario’s new tax policy. Although this new tax is a re-taxation of the old Provincial Sales Tax (PST), it now covers may services and items that earlier were without tax. Good for businesses, this is a direct assault on the consumer. Real Estate is affected in two ways that did have a dampening effect on our market. First it added what has been estimated to be from .4% to 1.0% added cost to the real estate transaction for an existing home. For a newly built product this is estimated to be an increase of from 8% to as low as 2%. Talk about inflationary!


With these two issues alone consumers chose to buy used and new homes earlier just to keep their costs lower. This is a sample of an informed consumer making good choices with the best knowledge they had available. What was not apparent was that these choices would impact the home market so greatly on the short term. For instance the MLS sales reported for June 2010 by TREB were 23% less in June 2010 than in June 2009 (TREB June Statistics). The effect of pent up demand of 2010 plus the potential increased costs of interest rates and HST had consumers make choices to buy before June and July 2010.


The short term market influences can be categorized into normal seasonal influences and unusual inactive events that have come to the fore at just the same time as these affordability issues. These short term influences are described as seasonality of the market, G20 paralysis, and heat and Global soccer mania.


It seems a bit silly but the Toronto market place was hugely impacted by G20. People simply left town. Businesses went into paralysis simply to not be caught up in any international event so large and so impactive on the community. Property showings in some parts of Toronto simply stopped as access issues stopped the normal activities of the market place. I believe this will be a defining moment in our marketplace which will again build up a pent up demand.


Follow G20 with a heat wave the like of which has not been seen in over 3 years and you elongate the slow down. Add one of the world’s greatest sporting events, The World Cup of Soccer, and again we have another short term event of impact on the market. People who watch the World Cup are not buying homes; they are watching and talking soccer. Silly it seems, but very real. This was brought home to me when I called a Realtor who was on my list of favoured recruits to add to my office. When I asked what he was doing one morning, he proudly related he was watching his favourite national team. Not available to change to my company obviously and certainly not listing or selling homes!


Finally there is the seasonality of the marketplace. July and August traditionally are family move and family vacation times. People use these times to regroup and refresh. Often households with children are moved in the summer for convenience of school transfers. So the negotiations and sales happen earlier in the spring. Again this short term seasonal influence hit in June and July. Talk about the perfect storm!


So what about the short and far term from here forward. The Toronto real estate market is strong with great momentum. New product is being built daily. Existing used home inventory is readily available and of high quality. This is especially the case right now as sales have moderated downwards due to all of the above influences. The expectation is for home prices to moderate slightly lower as Sellers decide they should move their homes rather than wait any longer.


On the other hand, lower sales volume has already impacted mortgage demand. Just yesterday the Bank of Montreal lowered its mortgage rates. All the other major banks are expected to reciprocate today. So affordability will return to what was seen during the previous quarter.


If I had a crystal ball, and I do not, I would suggest the normal, more balanced market has returned to Toronto and area. This is not only sustainable, but good for both the buyer who wants sustained affordability and value protection, and the Seller who wants an optimum sales price, in a reasonable period of time. Employment is strong, people are in general happy and life is generally back to normal. Although international events can impact our real estate market, right now it is liquid, priced affordably and positive. An investment in real estate in Toronto and area is still one of the best opportunities available for the average consumer.


So if you want a bubble, at least in the short term, purchase some bubble gum. Enjoy you summer, because the fall will be very busy and profitable!