What’s Going On In The Toronto Real Estate Market?

TorontoRealtyBlog

While that might sound like a keyword-friendly title, I assure you it's not by design.  But rather, it's the most basic way we can address, discuss, and analyze the current state of the Toronto real estate market.

There are reports that the sky is falling, and there are market bulls out there pumping the real estate market's tires, calling this a "blip," and/or ignoring the numbers.

So let me attempt to provide an unbiased look at what's going on in the market, and while any attempt will seem biased, depending on what side of the argument you are on, I assure you one thing is for certain: nobody can accurately predict the future…

Do you know what absolutely amazes me about Google?

They're one of the largest and most successful companies in the world, and they have a search engine that's market share is larger than every competitor combined, and yet if I want to do a search within a specific time period, I can't.

Tell me if I'm wrong here, but there's no way to search specifically, and only, web-pages created, say, between January 1st, 2004, and December 31st, 2004.

Now why do I want to search something from 2004?

Well, because over the past few years, I've kept magazine covers, and newspaper articles, about the Toronto real estate market crash.

It's been a hobby of mine, since I have always been a market bull, and I knew that the day of reckoning for all those market bears would likely never come, unless, their predictions had been well-tracked.

Use Garth Turner as an example, just for fun.

March 17th, 2008 – his book, "The Greater Fool: The Troubled Future Of Real Estate" hit bookshelves.  His hypothesis, as we all know, was that the real estate market was going to crash.  And while I don't have a copy in front of me, we could probably agree that his definition of a crash, along with many others, was that prices would drop somewhere in the neighbourhood of 30-50%.

The problem with that, of course, is that since Mr. Turner's book was published, prices of Toronto real estate have increased around 140% – or at least that was the number this past April, before prices started to decline.

So for Mr. Turner, and every other market bear who has been predicting the real estate market's demise, I ask this: "If you predict a 10%, 20%, 30%, or 40% decline in prices, and the market does decline by 10%, 20%, 30%, or 40%, but does so after the market increases by 140%, do you say, 'I told you so?'"

I think that's the definition of rhetorical, since not a single "expert" out there has come forward so far and said, "Holy $*@&$ was I ever wrong!"

But now that our real estate market has seen two consecutive months of a decline in the average home price, people are coming out of the woodworks, applauding their predictions from yesteryear, and ignoring the soaring price increases that followed.

So if only Google allowed me to search for more and more outlandish predictions, then I could really add to my collection!

Here's one I have on hand, from Toronto Life in July of 2010:

So many aspects of this ought to make you chuckle.

First, they're saying "$1.05 Million" as though it's a lot of money, and relative to what prices are like today, it's amusing.

Second, the "$151,000 over asking" seems trivial, against the $300's, $400's, and $500's over asking that we saw this spring.

And last but not least, the B-Word: Bubble.

"We're in a bubble?  Now What?"

"When it will pop"

"How bad it will be"

The bubble they spoke of – that 50% decline, just around the corner, never popped.  Instead, the average home price of $420,892 when this issue hit newsstands increased to $920,791 this past April – an increase of 119%.  Read: not a 50% decline and/or bubble "popping."

So at the risk of sounding like a greater fool than those who read Garth Turner's book, and suggesting that I'm giving an "unbiased look at what's going on in the market," the point I'm trying to make is that if prices in Toronto drop, you simply cannot ignore the massive increases that preceded.

And with that really long lead-in, let's get to the numbers.

TREB released its June Market Watch last week, and it showed a decline in the average home price from $863,910 in May, to $793,915 in June – an 8.8% decrease.

I'm not going to attempt to sugarcoat this; that's a big number!

And it came on the heels of the $863,910 average home price in May, declining from a $920,791 average home price in April – a 6.6% decrease.

That's a 13.8% decline in two months.

There are other numbers to talk about – active listings, total sales, etc.  But price is what concerns home-owners, and home-buyers.

So the obvious question is: if you're a home-owner, did your property just decline 13.8% in value in two months?

No.  It didn't.

Argue with me if you want, but I'm giving you my professional opinion.

Did the value of your home drop from April to July?  Absolutely.

But the "average home price" from TREB is simply that: an average.  It's volatile, inexact, and a month-to-month comparison, in my opinion, shouldn't be used in real estate.

A 3-month moving average?  Sure, that's better.

But I prefer the MLS "HPI" or Home Price Index.

Before we get to that, however, I want to look at those month-over-month numbers.

I've shown you this chart before in another post, perhaps a couple of months ago, but here it is again, up-to-date:

There are a few points I want to make about the month-over-month numbers, which I believe explain why you can't look at the last two months' decline as a measure of the overall market.

First and foremost, there are 65 month-over-month percentage increase/decreases.

The average home price has increased from $463,534 in January of 2012 to $793,915 in June of 2017 – a 71.3% increase in a little more than five years.

So with a 71.3% increase, in those 65 months of ups-and-downs, how many months would you expect to be increases?

All of them?

With a massive 71.3% increase in such a short window, maybe almost all of them?

Not quite.

Months of Decrease: 25
Months of Increase: 40

In 38.4% of the months posted in the chart above, the month-over-month average home price in Toronto decreases.

The second point  I want to make is that people are looking at two months in a row of average home price decreases as a pattern.

Two months?  Two consecutive months?

That's like the Blue Jays winning two games in a row, and calling it a "streak."

Two consecutive months of declining prices is significant based on the first four months of 2017 that we had, but only in that context.  On its own, it's not unusual.  In fact, this marks the eighth time from 2012 to 2017 that the average home price has declined two months in a row.

The third point I want to bring up is the most telling, and it gets right to the heart of the June numbers.

The average home price in June declined, and by a big number.

But relative to other June's, was this uncommon?

In the previous five months of June, how many of those months saw a decline in average home price?

Five.

All five.

No, the declines weren't as pronounced.  And you can point out from this chart that the 8.8% decline in average home price this past June is the largest decline on the chart.  But the 12% increase that preceded in February is also the largest as well.

If you want to call the two consecutive months of declining average home price in April and May a "pattern," then surely six consecutive declines in average home price in the month of June has to be a pattern as well.

Now let's shift gears to the HPI Benchmark.

I've been charting for detached for the same time period, and here's how it looks:

This will undoubtedly support any bullish argument toward the market, but I assure you that's not my intent.

As I said, I don't believe a month-over-month average is the best way to assess the market.

If you want to know more about how the HPI is calculated, or what it is, check it out here: http://ift.tt/2sWeVTa

In any event, it shows a decline, and that represents both the value of a property, but also a buyer's willingness to pay, as well as, in my opinion, a buyer's willingness to enter the market.

So I guess what I'm trying to say here, folks, is that the Toronto market has dipped, no question about it.  Prices have dropped, sales are down, and public opinion is that of concern.

But you have to look at the numbers, and what's behind them, to get a clearer picture of what's going on.

And to show you I'm not pumping the market's tires, let me say this: I honestly think that the average home price in July, and August will be lower.

That's right – I believe we'll see four consecutive months of a decline in the average home price.

But again, look at the numbers, and what's behind them – this is the summer, and the summers are usually slower in Toronto real estate.

And again, five out of the last five months of July have seen a decrease in the average home price.

Last July saw a decline of 5.2%.

So then the real question becomes: what happens in September?

The fall market is usually frenetic because it's only 2 1/2 months, unlike the spring market, which is basically 6-months (I know it's confusing since January to June is not "spring" but rather winter, spring, and summer, but that's what we call it).

Interest rates could be rising this week.

The 5-year, fixed-rate mortgages have already increased by 25 basis-points.

So does the market decline into the fall, or pick back up after a four-month downturn?

As I said at the onset, "Nobody can accurately predict the future," so you might think my question was a trap.  But while nobody can accurately predict the future, there is something to be said for public sentiment.

So in the spirit of predictions, I'll wager that 60% or more of you will comment below with a bearish outlook.

And let us not forget that the public is made of consumers, and public sentiment affects consumer behaviour.

So I for one, and genuinely interested in what you have to say…

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