Debunking Real Estate Headlines! Is The Toronto Real Estate Market Headed Up Or Down?
News headlines are sometimes misinforming and only show part of the picture. What I mean is that they like to talk about real estate sales figures, and then form a conclusion from that. For example, real estate sales are up implies prices are going up. And if sales are down, then price are coming down.
But basic economics tell us that prices are actually driven by supply and demand. So if sales are up, but listings also go up at the same rate, then the market should actually stay more or less the same. And the same time goes the other way, if sales are down, but listings are also down at the same rate, then prices shouldn’t budge much either.
To be a more informed investor, you would want to look more closely at the dynamics between supply and demand. So in this video, let’s dive in and examine where supply and demand are going in Toronto. And then using this data, we’ll discuss where Toronto real estate is really headed.
Canada Real Estate Trends
I mentioned most headlines only look at sales so it was pretty refreshing to see this headline recently. What I like about this is that it tells us that both sales and listings are falling in Canada but the main reason real estate is cooling is because sales are falling quicker than listings. And according to this article, sales are falling twelve times faster.
One thing you should keep in mind though is that Toronto doesn’t always act the same as the rest of Canada and we’ve seen it clearly over the past year and a half. So I quickly went to fact check this with our latest TRREB data to see how close Canada is to Toronto.
Toronto Real Estate Trends
The similar part is that both sales and listings are dropping and the market is slower than normal overall in Canada and Toronto. But the similarities pretty much end there. While the rest of Canada is still cooling because sales are dropping quicker than supply, we’re actually seeing things turning around in Toronto with sales dropping less than supply in Toronto. So even though here’s much less real estate activity than normal in Toronto, we’re seeing good support for current prices.
I really love the metric which you may have heard me talk about before, sales to new listings. What it is is a simple number you get by dividing total sales by total new listings during a period, which I think it the great indicator of how a market is really doing. The higher the number is, the hotter the market. Above 50% is typically a sellers market and below 50 is a buyers market.
Toronto Detached Properties
Take a look at this. In June, Toronto listings dropped by a pretty big 18% month over month but sales only dropped by 14%.
As a ratio of sales to new listings, detached properties in Toronto is now sitting at 62%. If you compare that with April’s ratio at 58% and May’s ratio at 59%, The number is getting bigger and bigger so it shows that sales have been dropping less than listings which means things are creeping up again. Now if you compare these numbers to the long term average at 60%, this is another comp and indicator that the market is picking up.
Let’s use this same strategy to look at semis in Toronto. Sales dropped by 6% in June month over month and new listings dropped by 16%, so semis have a similar story here, with a sales to new listings at 73%. If you compare that with April at 67% and May at 65%, we’re also on our way back up approaching our average Toronto semi detached sales to new listings ratio of 74%.
Finally let’s check out the situation with Toronto condos. There’s always been more volatility in the condo market and you can see that more obviously if you look at sales to new listings trends. The average sales to new listings ratio is 62% but for the most of last year, Toronto condos were a strong buyers market sitting at 30%. In the first quarter of this year, the peak ratio shot up to 91% a strong sellers market and then dropped back down to 56% at the lowest point in Q2. Now if we zoom in, we also see there’s early signs of Toronto condo pick up with June sales increasing 1% month over month even though listings dropped -1% – the sales to new listings ratio is now hanging tight at 58%.
What Does This Mean?
I think Toronto real estate might have already cooled off and we’re our way up again. Toronto is kind of like a recovery stock, so when things become more normal, we start seeing rents pick up and rental income improves. When this happens, more investors will want in on the action, more homeowners might decide to hold off on selling, and prices will continue to climb up.
And if you’re thinking prices are too high and buyers are going to get tapped out in Toronto, think again. If they’re looking in Toronto, buyers are already typically higher income earners, so they are generally less constrained by capital or borrowing capacity. There’s also more investors – and the general mentality here is to enter as long as the numbers make sense. It’s easier for investors to enter the market either from refinancing existing properties or even to partner up to buy, so there’s just more flexibility on capital and price for investors.
To sum things up, we see the Toronto slow down as temporary and we really believe that the strong fundamentals in Toronto is here to stay. And once people return back from summer, we expect an earlier busy fall season for both sales and leases.
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