Watch Toronto real estate heat up and cool down over the past year

Toronto real estate went from booming to excess in just a few short months over the past year. I’m preparing some notes for next week’s CMHC panel on the future of home prices, and thought I would give readers a peek at some of the indicators we use. This is a simple, but powerful indicator that just happens to look pretty cool on a map – buyer confidence in prices.

When buyers are confident in a market, they’ll pay a premium to enter. The thrill of the buy often leads to a rapid build of overconfidence, and that’s what happened in Toronto this year. To illustrate this, we graphed the number of people who paid over asking price.

Buyers Were Frenzied In April 2017

The video above shows buyer distribution, and visually graphs the increasing normalization of overpaying, and then the cooling of the market. Each blue dot represents a sale where transfer records show they paid less than the buyer was asking, a.k.a. it sold under ask. Each red dot represents a sale where the buyer asked for less than transfer records indicate they paid, a.k.a. it was sold over ask. Homes that were deliberately priced under ask for marketing (i.e. the seller priced way below market), were removed. Note, the dots show the vicinity of the sale, not the exact location, to protect privacy.

Toronto’s market started to pick up last summer, but it wasn’t until 2017 buyers began throwing money around. From January to April 2017, you’ll see sales over ask completely saturate the map. It isn’t until May that the trend makes a sharp reversal, making a steady drop into August 2017.

Over 77% of Buyers Paid Over Asking Price At Peak

Now that we have a visual of the madness, let’s go through the numbers. In August 2016, 37.16% of sales were sold over asking price. That’s solid demand, and shows a good amount of push and pull between buyers and sellers. At the peak in April 2017, 77.67% of sales in Toronto were over asking price. This is almost 4 out 5 buyers, giving sellers more than the steep price increases they were asking. By August 2017, that number has fallen back down to 23.7%.

Source: Better Dwelling.

Why Did It Stop?

The government likes to take credit for the cooling with the Fair Housing Plan that rolled out at the end of April. Although you would have to be pretty gullible to believe that a tax on the 5% of foreign buyers resulted in an immediate -19.76% decline in the number of people paying over asking price. The price of homes didn’t drop overnight because of a new tax, people paused just long enough to realize they became frenzied. Even the slightest regulatory breeze would have temporarily knocked sense into people.

Note, I said temporarily. Typically without a significant consequence to buyers, the public resumes piling into assets in a phase commodity analysts call the distribution phase. This is when people think a market has “returned to normal,” while larger investors “distribute” excess holdings to the public. Prices will climb for a short period again, followed by the public realizing large money is exiting, then trying to get out themselves.

Ideally this is orderly, but if it isn’t – that’s when you get the opposite of what happened in April. People begin irrationally selling below value, at a similar rate. The strange thing is, this is a very well-studied and documented phenomenon. People happen to do this with almost every commodity, almost every time.

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