A look at our real estate market past and future

If you’re like most Torontonians with an interest in our real estate market, you’ve probably been inundated with perspectives and predictions from the media recently. Reporters use headlines like “the only thing colder than Toronto’s weather is Toronto’s real estate market”. Analysts tell us that January brought a 22% decline in home sales, a 4% price drop, and that number of listings are climbing.

While this may be rooted in truth, what the media doesn’t tell us is to take these statistics with a grain of salt and assess the bigger picture.

The Toronto Real Estate Board (TREB) published their 2017 Market Year in Review & 2018 Outlook Report on January 30, 2018. 

Below I have summarized the key findings of this report, in an effort to provide anyone contemplating a purchase or a sale of property with valuable information about the key drivers behind 2017 market performance, as well as what to expect for the year ahead.  As a disclaimer, I am not claiming to author the content that follows; I am simply sharing information provided to me, as a TREB member, with my peers and valued clients.

What's included in this blog:

- 2017 vs. 2016

- Major contributors to 2017 Market Outcome

- 2017 in detail

- A glance at 2018

- Ipsos Survey Results

- Outcome for home sales and prices

- TREB stats for January 2018

- The 2018 Condo Market

I hope you find this information useful and it sheds a clearer light on what you are consuming through the media. Feel free to share this with anyone who may benefit, and if you have any questions, please don’t hesitate to leave a comment.  I would love to hear from you!

Here’s to a great 2018!

Rhonda

 

2017 vs. 2016:

• Total sales reported through TREB’s MLS® System was down 18.3% compared to the record set in 2016. 
• Overall average selling price of $822,681 was up 12.7% compared to 2016.  Average price was highest during the first quarter of 2017.
• Total new listings increased 15.7% compared to 2016.

MAJOR CONTRIBUTORS TO 2017 MARKET OUTCOME:

• The announcement of Ontario’s Fair Housing Plan (FHP), including a tax on foreign buyers, was the main impetus for the change in market conditions in the spring and summer of 2017 – although the claim is the effect was more psychological. Multiple sources confirmed that foreign buying activity was very low prior to the FHP and remained low afterward.

• Demand for ownership housing strengthened in the fourth quarter of 2017, perhaps indicating the waning effects of the FHP, and perhaps due to new, stricter mortgage lending guidelines announced for 2018, prompting home purchases earlier than they otherwise would have taken place.

• Notwithstanding government policy changes, underlying market fundamentals remained in place to support strong demand for ownership housing in the GTA in 2017. The unemployment rate trended lower throughout the year, and tighter labour market conditions promoted salary growth above the rate of inflation. This translated into enhanced consumer confidence in the ability to make large purchases. The ability for Toronto to create jobs on a sustained basis across a variety of sectors serves to attract newcomers from across the globe. Net population growth in the GTA in 2017 continued to be driven by immigration. All of these factors together serve to drive demand for ownership housing. The fact that borrowing costs, while up in 2017, remained low from a historical perspective also served to fuel demand.

 

2017 IN DETAIL:

• In line with favourable demand factors, home sales were reported through TREB’s MLS® System at a rapid pace in the first quarter of 2017 – up by 11.5% compared to Q1 2016. As was the case in 2016, however, home buyers were up against an extremely constrained supply of listings for all home types, with listing supply most constrained for the detached segment. This led to intense competition between home buyers and an accelerating pace of price growth that saw the annual average growth rate peak out at over 30% in March 2017.

• The strong price growth reported in Q1 2017 was arguably the catalyst that finally prompted the Ontario government’s announcement of the FHP in April 2017. The FHP included a 15% tax on foreign buyers. The impact of the FHP on the demand for ownership housing was swift, with the number of residential transactions reported through TREB’s MLS® System down substantially in the spring and summer months on an annual basis.

• During the spring and summer, active listings increased to more normal levels from a historic perspective. The result of fewer sales and an increased supply of listings was a moderation in the pace of year-over-year price growth, as buyers benefitted from more choice. However, when broken down by home type, home prices were not affected in a uniform manner. For example, the more expensive detached market segment experienced slower price growth than the condominium apartment segment. In fact, condominium apartment prices continued to experience double-digit growth, on average, throughout 2017, as demand remained strong relative to the supply of listings.

• In the fall of 2017, federal government policy pointed at mortgage lending guidelines. The Office of the Superintendent of Financial Institutions (OSFI) announced regulation changes that mandated stricter stress tests of borrowers from federally regulated lenders, in an attempt to mitigate potential risks to the Canadian financial system. Following this announcement, sales of ownership housing picked up noticeably. In all likelihood, a combination of buyers moving their purchase up before the stricter lending guidelines came into effect and the waning psychological effect of the FHP played into the uptick in sales.

The bottom line … much of the story of home sales, listings, and prices in 2017 was rooted in changes in government policy. It was a year where sales were down, but price and number of listings were up.

 

A GLANCE AT 2018:

“Strong local economic conditions coupled with an increased immigration target will result in sustained household growth in the GTA.  In the short term, however, government policy decisions and higher borrowing costs could act as a drag on demand for ownership housing.” (Toronto Real Estate Board)

• TREB forecasts that 85,000 to 95,000 transactions will be reported through it MLS System in 2018 (compared to 92,394 reported in 2017).
• The forecast range for the overall selling price will be between $800,000 and $850,000 pointing towards a flattening price trend in 2018.
• Continued rent growth well above the rate of inflation is expected for 2018 due to dwindling supply and newly-introduced rent control legislation.

IPSOS SURVEY RESULTS:

In November 2017, Ipsos undertook a third annual survey of intending GTA home buyers, on behalf of TREB. The survey sought to define what share of the GTA population was likely to purchase a home in 2018 and to understand what influenced the preferences and decisions of these would-be home buyers.

The Ipsos polling was conducted online with a final sample size of 1,000 ‘likely home buyers,’ defined for the purposes of TREB’s report as those who indicated that they were ‘very likely’ or ‘somewhat likely’ to purchase a home over the next year. 

The following summarizes the key points of the survey:

• 26% of GTA residents indicated that they are likely to purchase a home in 2018 (City of Toronto 28%, other GTA regions 25%).
• A year-over-year dip in buying intentions was most notable among first-time buyers.  In the fall of 2016, first-time home buyers accounted for more than half of all intending home buyers. In 2017 this segment of buyers represent 41%.  High home prices, stricter mortgage lending guidelines and tight condo market conditions could represent obstacles for first-time buyers in 2018.
• The most popular home type people plan to purchase in 2018 is a detached home, representing 47% of buying intentions: 54% in the GTA vs. 39% City of Toronto.
• Condo apartments are the second most common home type likely buyers intend to purchase, at 22% in the GTA and 27% in the City of Toronto.
• 31% is the average size of intending buyers’ down payment. 74% will use a mortgage.
• The survey also found that 26% of intending home buyers would have difficulty qualifying for a mortgage on their preferred home (29% for first-time buyers vs. 23% for existing homeowners, not surprisingly).

In summary, increased borrowing costs coupled with a stricter stress test regime will certainly affect intending buyers’ decisions in 2018. While some buyers ultimately may choose not to make a home purchase, others will choose to modify their desired home type and/or area.

 

OUTLOOK FOR HOME SALES & PRICES:

As discussed above, there will be factors in 2018 that promote the demand for ownership housing and others that act as a drag on demand. Strong local economic conditions, including income growth above the rate of inflation, coupled with an increased immigration target will result in sustained household growth in the GTA, both in 2018 and over the longer-term. However, in the next 12 months, demand will be stunted by the impact of government policy decisions and higher borrowing costs.

We will start 2018 with both the FHP and the new OSFI stress test regulations weighing on home sales reported through TREB’s MLS® System. Similar to the Greater Vancouver experience, however, we will start to see the psychological impact of the FHP, particularly the tax on foreign buyers, wane.

A 2016 Ipsos survey of REALTORS®, TREB analysis of assessment and land registry data, and a recent Statistics Canada report all found the share of foreign buying activity and ownership to be below 5% in the GTA. This number is not surprising given that net population growth in the region is based on immigration. It follows that the steep drop-off in sales experienced in the wake of the FHP will dissipate.

While the impact of the FHP will decline throughout 2018, the new OSFI stress test guidelines, coupled with higher borrowing costs compared to much of 2017 will stunt home sales to a certain degree.

Despite a dip in home sales, market conditions will remain balanced enough to see support for home prices, especially as we move toward the end of 2018. Months of inventory (how long it will take to sell a home) will trend between 2.5 and three months over the course of the year – up from what we experienced in 2016 and first quarter of 2017, but in line with what was experienced in the second half of last year. Balanced market conditions will result in an MLS® Home Price Index (HPI) Composite Benchmark that will increase in the mid-single digits throughout 2018, but will certainly accelerate in the second half. The forecast range for the overall average selling price is between $800,000 and $850,000. It is likely that the average price will be flat to down in Q1 and Q2, but up by more than inflation in Q3 and Q4.

When the short-term effects of the FHP recede, just as the effects of the foreign buyer tax did in BC, we will still be left with a supply problem in the GTA – for both ownership and rental housing.

The fact that months of inventory remained low, despite the initial steep drop-off in sales in 2017 is telling in this regard. Over the medium- to longer-term, market conditions will tighten up again as the region’s population continues to grow. If the supply of ownership housing does not increase to meet demand, we will move back toward a period of unsustainable, double-digit price growth.

The situation in the rental market is no different. Commentators in both the private and public sectors have suggested that more households should rent in the GTA. This suggestion would make more sense if there were reasonable prospects for an increased supply of rental units. However, additions to the purpose-built rental supply over the past decade have been inadequate. While the secondary rental market – condominium or freehold properties owned by investors and rented out – have picked up some of the slack, vacancy rates in this market segment are also rather low.

TREB STATS FOR JANUARY 2018:

• Total number of homes sold in the GTA fell 22% in January compared to the booming market one year ago, but the condominium sector remained strong as buyers chased a declining number of available units listed for sale.
• The volume of new listings climbed by 17%. The number of active listings at the end of January 2018 rose 136% compared to the same time last year.
• As listings rose, the average sales price for all types of homes fell 4.1% across the GTA in January to $736,783, a decline from $768,351 a year ago, weighed down by weakness in the detached house segment.

TREB said the declines are unsurprising because the GTA housing market exploded from January to April last year before the province introduced new measures in April to cool it, so last month's sales are being measured against a particularly high peak.

"At this time last year, we were in the midst of a housing price spike driven by exceptionally low inventory in the market," Jason Mercer, TREB's director of market analysis, said in a statement.  "It is likely that market conditions will support a return to positive price growth for many home types in the second half of 2018."

 

THE 2018 CONDO MARKET

The condominium market will be the driver of price growth in the GTA this year as demand for the most-affordable housing option in the region continues to outstrip supply.

There were just 2,591 condos listed for sale in the GTA at the end of January, down 44% from 4,602 condos listed for sale at the end of January 2017. There were 2,239 new condo sales listings in January, down 31% from 3,240 new listings last year.

The lack of inventory led to a 22% drop in the number of condo units sold in January across the GTA compared to a year ago, while the average condo price climbed 15% to $507,492 across the region.

The condo market was tightest in the city of Toronto, where many condos fetched well above their asking price following heated bidding wars. In Toronto, average condo prices hit $543,279 in January. Just 1,648 condos were actively listed for sale at the end of January in the city of Toronto, half the number listed at the same time last year.