Bad news first (for homeowners anyway).
Residential real estate is an asset class, like most others, save for two glaring facts: 1) it represents a crazy amount of leverage that most people would never think about using in a well-diversified and liquid portfolio and 2) it is a very emotional asset class (you likely love the home you live and raised your family in) more than a particular investment in your investment portfolio. Nonetheless, it is an asset class and when we begin a new relationship with a private client (and every six months after that)) the first thing we do is a Wealth Forecast where we get a sense for what your assets and liabilities are, monthly expenses, goals for the future etc. The output from this determines how much risk we need to take for you to achieve the required return to meet those goals. For sure, your house (and mortgage) are included in this Wealth Forecast as part of your assets and liabilities.
Anyway, on with the topic at hand...the bad news on what is happening, and might happen in the City of Toronto housing market. This will largely be a chart and explanation format.
First of all, on a Canada-wide basis, housing now represents about 20% of our total GDP (Gross Domestic Product). That is up from 17% in 2000. Not a huge increase but, to be sure, it matters to our economy.
At 20% of our economy, one could argue, "so goes housing, so goes the economy".
Keeping with the Canada-wide theme, another negative for the economy/housing market is the fact that the Canadian consumer is very levered. You have probably read about this on the front page of the papers. Remember how Canada was largely spared from the credit crisis in 2007 thru 2009? The Canadian consumer was under-levered at the start of the crisis in 2007 and, as interest rates fell, they began to lever up and spend our way out of what would have been a deeper recession in Canada, while our cousins to the south had to delever..Tables appear to be turned today. Although the media reports our Debt/PDI at 170%, on a apples-to-apples comparison to the US metric, we are at 157% (removing business loans from consumers). Nonetheless, getting up there and at all-time highs.
So far, we have a picture of housing being an important and substantial part of the Canadian economy and a consumer who is sitting with all-time high amounts of leverage.
Given the Bank of Canada (BoC) has suddenly changed their tune on interest rates (read Scott's blog from this morning: highrockcapital.ca/scotts-blog/central-banks-and-boc-singing-a-different-tune-on-rates), there could be very serious ramifications, on a mcaro basis, for housing. The fact pattern would go like this: BoC hikes rates, consumers get nervous about the leverage they are carrying and their ability to finance it if rates go up a lot, they pull in their spending, including home renovations (a big part of the home price increase that isn't captured in the data on home price appreciation), less renos and spending at Home Hardware means less of a multiplier effect in the economy..et voila...the BoC would then have a recession on their hands.
Part of what the BoC says/does on rates obviously affects the C$ and that affects (or used to to a larger degree) how foreigners look at our real estate as an investment. The C$ matters. Last summer spot Canada was at 1.2765 and it weakened up to 1.3800, representing over an 8% decline against the US$ making Canadian housing look that much cheaper. However, over the past two months, the C$ has increased in value from 1.3800 to 1.3000 showing an almost 6% strengthening, thereby making Canadian housing look more expensive.
And I will have more to say tomorrow on asset classes that the various levels of government insist on meddling in but, for now, we are all aware of the measures the Cities of Vancouver and Toronto have taken to affect the residential real estate asset class and those actions are clearly a negative.
The combination of the C$ strengthening that much in two months, BC and Ont effectively pushing foreign buyers out of investing in our real estate, and the BoC on the verge of hiking short term rates (who cares that inflation is plummeting?), one can only draw negative implications for Toronto housing.
City of Toronto
Now onto some Toronto Real Estate Board (TREB) data I have compiled. I generally used monthly data (it comes out every two weeks for members, which we are not one of) and only went back to July 2011 for time's sake. I created an excel file on various groups of stats and then created some charts to represent it better. Keep in mind, June data comes out publicly the first week of July (we hear, and intuitively know, it won't be great)
The first chart shows some fairly daunting stats around Active Listings, Home Sales and Sales Price all for City of Toronto Detached. I have some data for Semis and Condo Apartments which will be layered in at other times but, for now, let's just look at Detached homes as they were the hardest hit the past month. An explanation on each chart to follow.
First thing to note is that there is obviously a seasonality factor,as you can imagine. Most folks want to buy/sell in April/May/June so they can close in August, get moved in and settled before the school year and the last part of the work year begins.
As you can see, Active Listings were dropping/trending lower the last 5 years. The Average Monthly Active Listing since July 2011 was 1,580, to give you an idea. One of the reasons the market was going bananas in the Spring is because there was a complete dearth of Active (and New) Listings. For example, Dec had 488, Jan 543, Feb 656, Mar 987...all way below the 6 year average. And Semi-Detached Active Listings...77, 102, 123, 173 respectively. No wonder prices took off. But April saw 1,605 and May 2,242 on Detached Active Listings...we have to go back to Sept 2013 to see 2,235 Active Listings on Detached homes.
Why did Active Listings rise up so much in April and May? Quite simply, Sales (demand) dropped as buyers refused to participate in these bidding wars and New Listings (supply) came on to try to cash out. Supply increased while demand faded.
Detached Home Sales
As you can see from the middle chart above, Detached Home Sales are lower but not by a ton at 1,146 for May vs 1,268 for Apr and vs the monthly average since July 2011 at 981. The bigger negative here is that the month of May, as mentioned, is usually a bigger, seasonally strong month for Sales at closer to 1,500 than the 1,146 we just saw for May 2017. That ain't good.
Detached Sales Price
As you can see from the third chart above, Detached Home Sales Price trailed off a bit in May. It ended May at $1,503,868 representing a -5% drop month-over-month (mom) but still +17% year-over year (yoy). So looking back, we can see other months where the mom detached home price was down a similar amount...Dec 2016 at -4%, July 2016 at -5%, Nov 2015 at -5%, July 2015 at -5% and June 2015 at -6% and July 2013 at -8%. I suppose the optimist would say, "one month does not a trend make" as there are other months where the Detached Sales Price has dropped sequentially by as much or more over the past 6 years, however, May is meant to be a big selling month from a seasonal point of view and prices should follow up, not down. Note the other comparable mom decreases in prices were seasonally low months like Dec, June and July. Not a good sign of things to come, I am afraid.
Next, we are going to look at a ratio - Detached Sales to Active Listings.
Yikes! The only way to read this chart is that Active Listings have risen way faster than Sales are taking place which has moved the ratio all the way from 123% in Mar 2017 to 51% in May with a 6 year average being 66%.
As previously mentioned, buyers clearly pulled in their horns and decided enough was enough and sellers, who were on the sidelines last winter/spring, decided to all list quickly. Remember, April and May are supposed to be strong transactional months. We have seen this ratio come off in the past 6 years but it hasn't had a month of May where it has been below 60% (May 2013). I am not supposed to talk about positives for the market here but, being a contrarian, I can't resist...the only possible positive here is that the ratio of Sales to Active Detached Listings came off so fast and hard that it might settle in.
A word about New and Active Listings - I have been warned by some senior real estate agents (who I respect) that Listing data can be manipulated as listings come on one day and off the next and that may happen at the beginning or end of a month so it gets or doesn't get captured in TREB's data. Regardless, the trend seems apparent to me.
A final word on Listings, and just an anecdotal word. I receive a daily (midnight) email on specific houses I care about on certain search criteria (location, price, size etc). I can say that in April and May it took me a lot longer to read than in the winter. Listings were coming in like crazy. One problem...they were all crappy houses and crappy locations that folks were listing, all of a sudden, to ring the bell at the top of the market. They were never going to sell at those prices. June's numbers will tell us if those listings were pulled from the market making the ratio of Sales to Active Listings look better.
And the final chart on the negative side is the Detached Home Months Supply. This ratio is derived from Active Listings/Sales. Here it is again since July 2011:
Sudden spike as in some previous charts. We ended May 2017 at 2.0 months supply. The monthly average since July 2011 is 1.7 months. Mar and Apr this year were at 0.8 months supply. We have to go back to Aug 2015 thru Jan 2016 when it was between 1.7 and 1.9 months of supply to get close to May's 2.0. And Jan 2015 was north of 2.0 at 2.3. 2013 winter, spring and summer were all between 1.7 and 2.9 and the worst month was Sep 2012 at 3.1 months supply.
Some agents say "we don't have a problem with the months supply ratio until we hit 4.0 months". Respectfully, at least in the short run (6 months), I would disagree. Although we have seen spikes in the ratio before, the spikes are not typically in the prime transactional months of Apr and May, where the ratio seems to be in the range of 1.1 to 1.8 months supply.
That's it for the Negative side. Not exactly a pretty picture from the macro view Canada-wide to the various TREB metrics I have shown.
I won't even conclude my thoughts on the Negative side. Tomorrow will be the Positive side and then Tuesday will be the Conclusion on the entire market.
Keep in mind that there are other categories of homes such as Semi-Detached and Condo Apartments (obviously the largest). I will touch on these tomorrow. I have just used Detached as a benchmark for illustration purposes.