Earlier this week we published a piece on the divergence of supply and demand in Toronto’s detached market. A number of real estate agents sent us some hate mail to say a couple of months doesn’t mean anything, along with some not so cute nicknames for us. Then I saw institutional investment advisor (and one of the best in the biz) Ben Rabidoux drop a five-year chart that really highlights how big of a swing this is. Toronto is seeing detached listings rise at a massive rate, while sales drop. The general public might not understand how important of an issue this is, but smart money has been taking note.
Record Number of New Detached Listings
New detached listings are hitting the market at a much higher rate than usual, and it rightfully brings up some questions. April saw 11,863 new detached listings, a more than 50% increase from the same month last year. Last month saw 9,012 new listings, which was also an increase of 28% from the same month last year. To be clear, both numbers are higher than any monthly year over year increase observed in the past 5 years. So yeah, it’s a lot of listings.
It’s easy to spot the divergence of sales and listings over one year. It still leaves the question however, how this trend looks over many years? Source: TREB.
Sales May Have Just Peaked Early
This becomes a little more concerning to potential sellers when you couple it with declining sales. There were 5,715 sales in April, a decline of 5.72% from the same month last year. This was also a 2.92% decline from the month prior. Typically going into spring, sales increase not decrease. Actually, a decline from March to April has not occurred in at least five years prior. Some people will argue that the decline is slight and shouldn’t be a concern, but a divergence of sales and listings is always an issue worth noting.
The gap between detached new listings and sales in Toronto narrowed until 2016. In 2017, this trend is broken. Broken trends generally signify a swing in market direction. Source: TREB.
Market Mechanics In Action
A typical market is simple, less supply and more demand equals higher prices. However, this isn’t a normal market. Overheated markets like Toronto are often said to be operating on greater fool theory. This is actually a technical term, for a not so technical process. People are purchasing a home not based on any fundamental value, or even because they think it’s worth the price. They’re buying because they think prices will always go up. These people operate on the assumption that since prices “always go up”, they can simply unload the property at any time to what economists lovingly call, “a greater fool.” The next person that buys at an inflated price likely thinks the same thing.
These are the same people convinced a super rich foreign buyer wants to purchase their beatdown bungalow in the suburbs. You know, because why wouldn’t one of the world’s wealthiest people, who could live anywhere, pick a bungalow in the suburbs? A suburb, in a neighbourhood consumed by an opioid crisis. Yup, that makes perfect sense.
Toronto’s new listings for detached units overlapped. It’s a little easier to see how much more inventory has hit the market. Source: TREB.
What This Does Not Mean
Markets that operate like this aren’t using fundamentals on the way up, and they won’t use them on the way down. Buyers had more options last month, and less people competing for the same listings. What did they do? Instead of negotiating prices down, they bid more, and closed faster than when there was less inventory. The function of supply and demand was not in effect, and won’t be until there’s a change in buyer or seller mentality. So don’t expect lower prices, unless there’s a sudden market shock.
Market Shock Is Closer Than You Think
This information of a pending shock in the near future is already circulating amongst banking insiders. Earlier this year, the Bank of International Settlements warned the banking industry that Canada was at a high probability of a recession, and they said it could be as soon as the end of this year. This week Moody’s downgraded Canadian banks, warning institutional investors that your mortgages are nowhere near as good as gold. Generally speaking, insider trends will take 12 – 16 months for the average person to notice. Makes you wonder why so many bank executives were selling their homes just a few months ago, now doesn’t it?
Caveat Emptor (Buyer Beware)
Real estate agents are an essential part of the home buying process, and I wouldn’t try to buy without one. However, at 48,000 in the city of Toronto alone, not all of them know what they’re talking about. Even high profile agents analyze based on current market conditions, not relative conditions. Most have no idea how the shadow banking system plays into the market, or what a deposit run means for mortgage issuance. If you have an agent in this market that is not telling you there are risks associated with buying now, find a new agent.
In my opinion, Toronto won’t see a pull back on prices for detached units for at least a year. The surge of subprime buyers in the city has me convinced that the market is being driven by less financially sophisticated individuals. These types of buyers are stretching themselves thin to buy a dream of riches, not a home. Odds are pretty slim that they’ll consider the facts before the facts find them.
There’s a reason both professional investors and professional gamblers say the same thing, “never put down more money than you can afford to lose.” This doesn’t change if a real estate agent thinks it’s a minor blip, or they say analysts are “f**king morons.”
Note: Some agents will quote active listings to say inventory is down. Read why there’s issues with this number here.
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This whole Jenga board is coming down. We concentrated our whole economy in two industries, against all logic.
Trudeau also killed the second industry, and now we’re down to one. The Liberal Party will ensure it’s milked until it runs completely dry and takes the economy down with it.
Don’t worry though. They’ll just hit us with a round of QE and pretend it never happened. Why wouldn’t we just devalue all of the work Canadians do to reduce their spending power.
I 100% agree with you Stephen. I also agree with what you said on Twitter, where prices may not come down – the power of the dollar will decline rapidly and inflation will run out of control. But the important thing is paper millionaires be everywhere.
Glad you wrote this piece. It was surprisingly balanced. People that are real estate bears are mocked in Toronto, meanwhile the banking industry is organizing for a failure behind closed doors.
10 years ago, agents helped you find a deal, or access stats you couldn’t. Today they’re more interested in predatory sales, and think the banks, funds, institution, and government are all wrong about real estate.
Remember, a real estate agent is a very specialized person. Not everyone has a weekend to take a class, and can pay a registration fee every year.
is there the “Vancouver New Detached Listing” similar to the one above for Toronto that I could see?
thank you!
lack of inventory has been a constant problem for 12 years.. now we have one month of Increased inventory. I thought the Real Estate market was supposed to tank in 2010, or was it 2011, or 2012 or 2015 ? I’ve lost track of doomsday articles.
I’m not running a doomsday clock, and definitely wasn’t saying that in 2010. Mortgages looked healthy, and prices increased lock step with depreciation of the dollar up until last year. When the international banking community started to position themselves, and the banks that actually lend the money for mortgages said there’s a problem, that’s when it became an issue.
In 2010 we barely had a shadow banking industry. In 2017, it’s half the size of the regular banking industry by the Bank of Canada’s count (the most conservative).
It’s not one month of increased inventory… if you look at the chart objectively, you’ll see that the increase in inventory past historical norms started in February… we’re in May now!
And s someone who just sold his house in late February, expecting the exact market conditions we are seeing now, I can tell you that the Greater Fool theory was at its peak… the people who looked at our house didn’t even look like they could afford a pair of jeans, let alone a $1.5M house.
And the person who bought our house borrowed money from friends and lines of credit to come up with the down payment, not to mention arranging a mortgage with an alternative lender at above 4%.
He is now trying to rent the house for 40% above the going rate and even if he gets full list price (1 showing so far in 3 weeks) the rent won’t cover his payments!
Man, what a sucker.
You guys do great analysis! Thanks.
I looked at the listings in our neighbourhood this morning. I know it’s anecdotal, but it seems listings have tripled from 2 months ago at least (Beaches) and prices are all over the place. Some seem like ‘greater fool’ pricing whist others seems ‘price really low and take the best offer (or pass)’. I agree with your assessment the correction in price won’t be fast, trends tend to persist much longer than fundamentals would dictate, but when it comes….it will be brutal and sudden.
I’ve noticed the same thing in our neighbourhood… listings are way up and listing prices are much lower than they were two months ago.
And our friend (who has been a very active speculator for the past 18 months and was a builder before that just listed one of his homes for 25% below what he thought he would get and 20% below and offers he had two months ago and no one showed up on offer night! And this is in arguably the hottest area of Toronto, Willowdale East.
Granted, there is serious buyer fatigue and a lot of buyers want to avoid getting into bidding wars now and that may help explain this situation for now. He relisted at what he thinks is market value. It will be interesting to see how he manages… I’m of course keeping my fingers crossed for him but I’m doubtful the market is as hot as many people still think it is.
Phenomenal article and analytics. Thanks!
Hi,
There are results that are drawn from analysis and there is an analysis that is made to support the result you want. I think this article is about the later case.
It is no news that the market has slowed because of government intervention. The chart you are showing is an anomaly because of hard handed government meddling and not any economic reason. Government had warned and sellers reacted by putting more listings and buyers reacted by holding on buying. Many people who would generally have listed 3 or 6 months later, listed now. This does not mean that there will be a huge influx of listings especially of detached homes in Toronto on an ongoing basis. The lull may last 3 – 6 months or more and no one really knows. Even in Vancouver where foreign buying was a bigger issue the market has already started recovering.
The fact is there are more households (population divided by average size of household) in Toronto than ever before and the number of detached homes is not increasing. I do understand that the prices went quite high in 2016 but that does not mean the prices are over inflated. Toronto has been a cheap market all through out while the city has been growing and expanding. Even today central Toronto is one of the cheapest than most largest cities in all developed countries. No where in the developed world and even many developing countries you can buy similarly located housing with the same convenience for the prices of Toronto – try London, New York, San Diego, Paris, Milan, Singapore, Mumbai, Shanghai and what not. And I don’t believe people in many of those countries are wealthier than Canadians or have higher incomes.
The fact of the matter is you know nothing and so do I. Markets will do what they do. Average houses are never bought by average income people but by people with higher incomes. You covered no study of demographic trends, income, employment, migration between provinces plus you totally overlooked the government intervention and made it appear that this is all economics playing here.
Mr Singh,
It seems like you are either a realtor or holding houses in Toronto area and cannot sell them on the price you are looking for.
I see in your article you mentioned Mumbai- I believe you know already what happened in India later last year when government changed its currency bills. House prices are almost down by 25 to 50 % depend on locality.
As far as immigration is concerned, you will find another article on this blog with a comparison of immigration numbers and housing numbers that will clear your doubt on this.
At last i heard about many Singhs having 5 to 10 houses bought for only $200-$300 K ( especially look at brampton, missisauga listings) and now asking for millions- that’s greed.
Lol, wicked burn, U Singh!
Another great article and very interesting that listings shot up past their historical/normal range back in mid February before there was even any talk of action from the Ontario government.
This leads me to believe that capital inflows into China and therefore out of many real estate hotspots like Toronto and Vancouver has had much more of an effect than the housing action plan… and that “foreign” money is not as insignificant in Toronto’s real estate market as some vested interests suggest.
I’m dying to see the next set of data from the Greater Vancouver Real Estate Board to see if the recent increase in detached prices will be sustained or if we were indeed seeing a dead cat bounce in the market.
Mr Singh,
It seems like you are either a realtor or holding houses in Toronto area and cannot sell them on the price you are looking for.
I see in your article you mentioned Mumbai- I believe what happened in India later last year when government changed its currency bills. House prices are almost down by 25 to 50 % depend on locality.
As far as immigration is concerned, you will find another article on this blog with a comparison of immigration numbers and housing numbers that will clear your doubt on this.
At last i heard about many Singhs having 5 to 10 houses bought for only $200-$300 K ( especially look at brampton, missisauga listings) and now asking for millions- that’s greed.
Sorry it should go on the post above.
Everyone says the Toronto market can easily be explained by simple supply and demand dynamics – this is true but I’m often shocked how unsophisticated the analysis of supply is (ie the only way to solve this is by building more houses) – supply can also be created by investors dumping their inventories – I know many people – many of them real estate agents – who are doing exactly this. Sellers are now panicking that the gravy train is ending and are selling now. However the ground has shifted under their feet and they are all still in denial – rejecting offers that don’t match comparables in their area – relisting even higher and then getting no offers at all. And then you get all the ppl who bought first and now can’t sell who can’t finance the upgraded house they just bought. Home Capital – though not significant in terms of relative number of mortgages – is another trigger. Moody’s downgrade – another. Markets driven disproportionately by speculation are the ones that collapse as their foundation is sentiment driven – as soon as sentiment changes – the whole house of cards will come down. Another few triggers – herd mentality will hit sentiment.
Sorry it should go on the post above.
Yup. Like the stock market. Its a classic pump and dump scenario. You get a nice stock with lots of hype behind it, unbelievable growth, and suddenly bad news starts coming out from all angles and it smells bad, so people start jumping ship and the price drops dramatically. Even in the 2008 crisis, people (including the institutions who went bankrupt) were in denial and those who did see the cracks in the foundation, and then subsequently saw the foundation actively crumbling, they made out nicely because they were not invested in an idea with no reality behind it.
people who fail to learn from history are bound to repeat it… same BS was spewed before the 90s crash, and it took 4 years to hit bottom. Just look up newspaper articles to see the parallels.
Housing always reverts to the mean.
Always.
It was a great run… but dont get caught holding the bag!
Well stated George. Historically, the biggest price increase was in 1987 of 36%. Two years later a complete collapse of the market. Not everybody lost their homes, mostly only those who bought in the last couple of years, and all the speculators…. which was a lot of them. You would have thought there was an election or something with all the for sale signs in everybody’s front lawn !
I remember that effect of 1987, even though I was just 8 or 9 years old at the time. Its that same “damn, we got screwed…no more frills and big hair, back to basics” mentality/sentiment that made everything about “grunge” so fashionable. Art imitates life.
I am a big fan of your blog and housing bear blogs in general! It started when I stumbled onto Ben Rabidoux’s blog The Economic Analyst about 10 years ago. At the time I just graduated from University with an Engineering and Business degree, maybe why I gravitated to his technical analysis. As my friends, co-workers, and family members bought houses, I waited on the sidelines renting. I would read his blog religiously taking in all his metrics, graphs, and his predictions of the imminent crash. Until one day Ben removed his blog from the web. I don’t blame him, probably to erase his countless wrong predictions from the memory of the internet.
“Prices will start to experience year-over-year declines soon … with prices off 5% to 10% by the New Year. Next year [2011] will be the big show with a 10% to 20% melt, followed by a multi-year grind lower.”
Maybe this will finally come true this year [2017]. Maybe not. Prices would have to correct well over 60% just to get back to the 2010 levels in which Ben thought were already astronomically high. Maybe us renters will finally get a break.
The opportunity cost of not buying a home has been enormous for me. Not just financially but also taking a toll on my mental well being. The lessons I’m trying to learn are:
– you can’t time the market
– you cannot compare the market / global economy of today to that of 1989
– read these internet blogs for entertainment purposes only!
Maybe I should just finally buy a house this summer, take advantage of this relative ‘cooling off’ period. Maybe not. Probably just rent for life, and keep reading these blogs! lol
The difference between then and now is the rise in prices in 2010 has been “orderly and steady” meaning it was just a gradual climb, an unsustainable one, but still gradual. It was almost like the boiled frog analogy where you can put a frog in water and gently raise the temperature and it will adjust even the if eventually the water is at a boiling temperature. However, if you dump a frog in boiling water it will explode. That is where we are right now as prices started to become parabolic last year and the continued the first quarter of this year. That is not sustainable and ends badly for any chart. Now what we have is fatigue from buyers coupled with some extraneous forces like Home Capital, Provincial plans and a spike in inventory.
My advice since 2010 has always been to buy what you can afford without overextending yourself. Just because a bank will provide you leverage 10-1 doesn’t mean you should take it. Historically a ratio of around 4-1 or 3-1 income to mortgage always puts a family in a good situation to weather the storm. Debt remains even after prices fall and interest rates rise and a generation of buyers don’t think that is possible why is why we are where we are.
I am wary of believing everything on a bear blog 100%. (I think you know which one I am referring to). Only because these predictions are still tinged by a human’s lived experience, and their internal biases. If someone is constantly pessimistic and wants to see everyone else fail or get screwed or sell them some kind of insurance for it, then yeah, they will write that prediction until they believe it themselves and try to convince others to believe it with them. Misery loves company, after all. Show me hard numbers that back up a bear call, and then maybe I will believe you. “The Big Short” was so great to watch because those people who were seeing and predicting the market crash were not necessarily pessimists; they were non partisan opportunists who had a deeper understanding of the financial market numbers than most people, and at the same time, they also didn’t drink the kool aid. Just because you’re a bear, it doesn’t make you right. Bear bloggers, like the rest of the public, are reactionary. As are the markets. It just depends on how aligned the sentiment is with the actual numbers.
I’m guessing you’re not a regular reader of this blog. The big difference between this site and Garth’s is Garth has been predicting a crash for 10 years. Other than this one author, I don’t think they’re predicted a “crash” in the market.
Most of the bearish opinions on this site have come from the horses mouth, the Bank of Canada, the Ministry of Finance, and even the FAO have done interviews here that I’ve read where they sound more bearish than Garth. Which says a lot, because these are the Government organizations that actually have the whole picture, not like Garth or even this author that can only infer through open public data sources.
G Singh, I find it funny you start your comment saying “there is an analysis that is made to support the result you want” then go on a rant that makes way less sense to support the result you want. hahah.
I also find it comical people like you like to compare Toronto as some sort of world class city like New york, Paris, London, hong kong, shanghai etc. not to mention this growing and developing you are talking about is actually not keeping up with the population growth, as the currency keeps loosing value. Our oil industry has taken a huge hit, Seems lumber is next due to our buddy Trump, and now its basically the housing market is the 1 trick pony keeping our economy going. And as for this development you speak of just compare the TTC transit map compared of our so called world class city to Paris, London, NYC etc. not to mention the TTC pass costs more than New york’s metro pass.
People in Toronto are drunk off the free easy money, its no different than a crazy party with an open bar. If you tune out your selective hearing on this topic you’ll notice people are starting to slur thier words, can’t walk straight and are about to get cut off. The Hang over is going to be epic when it comes.
[…] It’s particularly pronounced in single-family homes. The number of those on sale soared by 50 per cent this April to its highest in at least five years, according to an analysis by Better Dwelling. […]
[…] removed. Prices are still creeping up in Toronto, but at a smaller rate than they previously were. Meanwhile listings are soaring, as people try to exit. Toronto needs to continue building to prevent an actual housing crisis in the future, but if you […]
[…] removed. Prices are still creeping up in Toronto, but at a smaller rate than they previously were. Meanwhile, listings are soaring as people try to exit. Toronto needs to continue building to prevent an actual housing crisis in the future, but if you […]