Home Prices Sink, Sales Plunge in Toronto

by Wolf Richter, Wolf Street:

Homeowners who bought a year ago are down C$110,000 on average. 

Home sales in the Greater Toronto Area, Canada’s largest housing market, plunged 35% in February compared to a year ago, to 5,175 homes. The plunge in volume was spread across all types of homes. Even the previously white-hot condo sector froze over:

• Detached houses -41.2%
• Semi-detached houses -28.7%
• Townhouses -26.8%
• Condos -30.8%.

New listings of homes for sale rose 7% year-over-year to 10,520, according to the report by the Toronto Real Estate Board (TREB). The total number of active listings of homes for sale – which includes the new listings and the listings from prior months that hadn’t sold – skyrocketed 147% year-over-year to 13,362 homes.

At the current sales rate, total listings signify a supply of 2.5 months, which indicates that the housing market isn’t exactly drowning in listings, but the heat has burned out.

This is confirmed by the average days on the market before the home is sold or the listing is pulled: at 25 days, it was still relatively low, but it had nearly doubled from 13 days in February a year ago when the market was approaching its April apogee.

The plunge in sales volume, which has been going on for months, and the surge in listings signify that the market is in the process of changing direction. Housing markets move very slowly, over years, and not minutes. But prices are now following the decline in volume.

The average price for the Greater Toronto Area (GTA) plunged 12.4% overall to C$767,818. This represents a drop of about C$110,000 in the average home price over the 12-month period.

It split up this way:

• City of Toronto: -6.1% to C$806,494.
• Rest of the GTA without Toronto: -16.1% to C$743,196.

The movements of average prices showed a large disparity by home type, between condos, whose prices still rose despite a 30% plunge in sales volume, and the rest of the market:

• Detached houses -17.2% to C$1,000,736
• Semi-detached houses -8.6% to C$756,894
• Townhouses -2.9% to C$638,691
• Condos +10.1% to C$529,782

The TREB does not disclose median prices. But in addition to the above average prices, it offers its own proprietary “Home Price Index Composite Benchmark,” which rose 3.2% year-over-year for the GTA, driven by price increases in condos and townhouses against price declines in detached houses and semi-detached houses.

“Prospective home buyers are still coming to terms with the psychological impact of the Fair Housing Plan, and some have also had to reevaluate their plans due to the new OFSI-mandated mortgage stress test guidelines and generally higher borrowing costs,” the report said.

The housing bubbles in Toronto and Vancouver that have been inflating without major disruptions for the past 18 years – not even the Financial Crisis put a major dent into them – have landed near the top of the lists of housing bubbles around the world, driven by numerous factors. Over the past 10 months, however, several changes have happened to contain the damage:

1. On April 20, 2017, the Ontario government introduced a 16-point laundry list of measures, including a 15% transfer tax on nonresident foreign buyers, designed to tamp down on the housing market and improve affordability (= price declines).
2. Since June 2017, the Bank of Canada raised its benchmark interest rate three times, to 1.25%, in line with the Fed’s lower end of the target range.
3. And as of January 1, 2018, the Office of the Superintendent of Financial Institutions (OSFI) requires new stress tests for variable-rate mortgages, on top of the stress tests that existed before.

Most mortgages in Canada adjust to interest rates either immediately or within a set number of years, such as five years. The 30-year fixed-rate mortgage, standard in the US, is rare in Canada. Hence, many homeowners are very much exposed to a rising interest rate environment, which pushes up their mortgage payments. If they stretch to purchase near the peak of the market, as interest rates rise, they face higher mortgage payments going forward, even as the value of their homes starts to decline. This is a toxic mix.

To tamp down on these risks, the OSFI instituted the new stress tests. Applicants for variable-rate mortgages need to qualify at the minimum specified rate of the stress test, or at the actual rate they’re borrowing at plus 2%, whichever is greater. In other words, if the prospective home buyer gets an offer from a lender of 3.5% on a variable rate mortgage, the buyer has to qualify at a rate of 5.5%. This blocks many buyers from getting a variable rate mortgage.

This is one of the many “macroprudential” tools that Canadian authorities are using to let the hot air out gradually, as the Bank of Canada remains leery of raising rates more sharply.

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