Rob's Real Estate Report
March 2023 Housing Stats & Analysis
By Rob Pilon: I want to examine stats for January, February and March of this year only. Let's see if we can discern a few micro-developing trends in the first quarter of 2023.
Additionally, I'll compare these months against February 2022 when prices peaked in all TRREB areas and for all property types combined at $1,334,544. Then, you can take a deeper dive into main cities and towns such as, Oakville, Milton, Mississauga, Brampton, Caledon, Toronto, Vaughan, Markham, Richmond Hill, Aurora, Newmarket, Pickering, Ajax, Whitby and Oshawa from the tables at the bottom of this report.
But first the big picture:
The first four columns in the table above should be viewed as a whole, but we'll start with the first three: "Month", "Average Price" and "% Price Change Month-over-Month". Average prices dipped from Dec to Jan by 1.2% which is rare but happened two other times in the last ten years. February's prices rose 5.5% above January's prices which is more in keeping with very early-spring price movements. March prices went up 1.2% from February. Again, nothing too much out of the ordinary. Basically, prices have been inching up over the last 2 months.
Look at the fourth column. Average prices in March 2023 were 16.9% lower than the peak in February 2022. March 2023 prices are 1 percent closer to Feb 2022's peak prices compared to Feb 2023's average price. I'll keep track of this metric each month. It'll be interesting to see how the "Feb 2022 peak to current month" margin narrows in upcoming months and possibly years. At prevailing mortgage rates, there's no way buyers can afford monthly payments at Feb 2022 peak price levels. Remember, prices peaked in Feb 2022, then fell 19.5% in 5 short months. If only there was a similar boom-bust scenario in the past that we could examine to see how long it took prices to recover after such a crash. Extrapolating from a past crash recovery period could give us a clue as to how long prices will rebound after our recent crash. But where can we find a 19.5% crash in 5 months in TRREB's recent past?
Hmm, how bout 2017's crash and subsequent price recovery period:
From my graph above, prices crashed 20.3% in 2017 in the span of just 4 months from April to August 2017. That's a pretty close comparison to prices crashing 19.5% in 2022 in the span of 5 months from Feb to July 2022. Regarding 2017, prices peaked at $918,138 in April then plummeted to $731,606 by August 2017. How long did it take for prices to recover and climb back up to the 2017 peak of $918,138? Three whole years. It took 3 years from April 2017 to May 2020 to reach $918,138 again (see green line). Look carefully at the slow but steady upward trend in prices on the above chart from August 2017 to May 2020. There were many dips along the way especially in summer and winter months as prices seasonally adjusted downwards during those periods. Prices appreciated in spring and fall because buyer demand outpaced supply in those seasons.
Real estate history rarely repeats itself in exact proportions, but 3 years of gradual real estate appreciation after 2017's crash makes you think about what lies ahead for the GTA after our most recent crash, which was similar in severity and speed of decline to that of 2017. Granted, current economic forces are different than what they were after 2017's crash, nevertheless we may see intermitant fits and starts in prices over the next year or two, similar to the price recovery period after 2017. Spring and fall gains tempered by summer and winter losses, inching us slightly higher after each 12 month "up and down" real estate cycle. No doubt, some cities like Toronto and other towns will fare better than others. That said, no one knows how it will truly play out. Just food for thought.
Many factors will affect the real estate market going forward: Relentless immigration of well educated people filling high-paying jobs; cronic low resale and low new housing supply; whether inflation remains sticky or not and for how long which will affect the Bank of Canada's policy rate; will it prove difficult to lower inflation to the 2% range without holding or raising rates further which can trigger job losses [it's become common knowledge that inflation can be lowered to the 3% range much easier than getting it to 2% which is the number Tiff Macklem (Governor of the Bank of Canada) needs to hit before he lowers the current 4.5% overnight rate]. It's unlikely inflation will slip nicely into the 2% range when job growth, wage growth and the cost of services remain high. Macklem recently stated, "if monetary policy is not restrictive enough to get us all the way back to the two percent target, we are prepared to raise the policy rate further to get there". If rates go higher, buyer demand for housing will weaken further due to greater affordability constraints.
Another x-factor on the housing market is the effect current high mortgage rates will have on homeowners, and that high commercial lending rates will exert negative pressure on businesses in the coming 2 years. Approximately 1.1 million Canadians will face steap mortgage renewal rates in 2023. Higher mortgage renewal rates, high HELOC rates, and the unpredictability of house appreciation expectations will dampen consumer spending. Homeowners are no longer using their equity as an ATM to purchase unneccasary, superfluous, unneeded and gratuitous items. Less is being spent on home renovations as well. It's become too expensive to use home equity to purchase an investment property for most because typical real estate investments like condos will not produce a positive cash flow without a downpayment of over 40%, not including higher incured HELOC costs.
If a recession sets in, the real estate market will see further buyer demand erosion. Employees don't need to actually lose their jobs in a recession for them to forego a home purchase. Simply becoming uncertain about the security of their jobs will pause any home buying plans. When potential home buyers become worried that there may be job cutbacks in their department or on their team, they don't buy houses. Conversely, if one spouse or partner loses their job in a recession, more homes flood the market. Recessions usually cause lower demand and produce higher supply, which puts downward pressure on prices. But not all recessions are created equal, so it's possible real estate prices weather the storm this time and move sideways for awhile, or, prices fall for a season then recover quickly when mortgage rates drop. The greater the recession, the greater the rate cuts from the Bank of Canada to stimulate the economy and kill the recession. Stock markets usually trend lower during recessions which drives investors into safe government bonds, which lowers bond yields, which lowers fixed mortgage rates, which re-invigorates the housing market. 5-year fixed mortgage rates are low-ish currently because the run on deposits of Silicon Valley Bank in California, Signature Bank in New York and Credit Suisse in Switzerland sent a scare through the investment community that the banking industry is not as secure as expected for various reasons. Consequently, large sums of investor money headed straight to safe government bonds, which lowered bond yields, which lowered 5 year fixed mortgage rates because fixed mortgage rates are calibrated to bond yields. Variable rate mortgages are affected by the prime lending rate which is tied to the Bank of Canada overnight lending rate. However, who knows if a recession will even materialize, and if it does, how severe it will be, or not.
Now back to our original table:
Sales were up in Feb 2023 and March 2023. This stat on its own doesn't tell us much except that buyer demand is trending upward as the spring market unfolds, albeit at a much less robust pace than former Feb/March increases. But increasing demand is better than flat demand as seen in Dec 2022 (3,177 sales) and Jan 2023 (3,100 sales). April 2023 will see even greater sales numbers than March 2023 when TRREB's April stats come out in the next week.
The Sales to New Listings Ratio (SNLR) column is often misunderstood. Each month the number of new listings that come onto the market for that month are added up. All the sales for that month are tallied up as well. But here's where people get it wrong. SNLR does not look at all the new monthly listings to determine which new listings sold that month. If that were the case, then it would be called "the percent of new listings that sold" column. Rather, the Sales to New Listings Ratio is simply a mathematical stat that indicates the percent of sales to new listings, not the percent of new listings that actually got sold.
For example, if 1,000 new listings came on the market in March and 500 homes sold in March, then the Sales to New Listings Ratio is 50% (March sales divided by new listings in March). It does not mean that 50% of the 1,000 new listings got sold that month. Not all 500 sales have to come from the 1,000 new listings. If there were a grand total of 200 listings that remained unsold at the end of February (called Active Listings, or the number of listings that remain active at the end of February), those 200 active listings carry over into March and get added to the 1,000 new listings that came on the market in March. You now have 1,200 listings in March (200 active listings carried over from February plus 1,000 new listings in March). In reality, the 500 sales in March will come, in part, from the sales of new listings that came out in March AND, in part, from the sales of active listings that were carried over to March from February. So again, the Sales to New Listings Ratio is not asking what percent of only brand new listings get sold every month. It’s simply asking what percent of brand new listings in March EQUAL the number of sales in March, without caring what combination of new listings and active listings were part of the 500 sales in March.
So in the above example, 50% of the 1,000 new listings that came out in March EQUALS 500 sales in March (even though these 500 sales came from an untraced combo of sales of new listings plus sales of active listings). In other words, the 500 sales in March could have been comprised of 72 sales of the 200 active listings that entered March from February plus 428 sales of the 1,000 new listings that came out in March. TRREB doesn’t care about or track such breakdowns.
Finally, when buyers are very aggressively flooding the market and there’s low supply, it’s possible for the sales to new listing ratio to be something like 110%. Making adjustments to the example above, it means 1,100 sales happened in March, but only 1,000 new listings came out in March (sales divided by new listings = 110%). Here's what occurred in a case like this: 1,100 sales came from the sale of all 1,000 new listings in March plus from the sale of 100 of the 200 active listings that were carried forward into March at the end of February.
Hope all this made sense.
Look at the SNLR column above. Sales equaled 40% of new listings in January, 57% of new listings in February and 62% of new listings in March. Three consecutive increases which means buyers are purchasing more listed properties every month. Think about it, if sales equaled only 25% of new listings, then a greater number of unsold listings (active listings) would carry forward to the next month, and added to new listings in the next month. If such a trend continued for a number of months, then active (unsold) listings at the end of each month would accumulate until supply far exceeded demand, putting real downward pressure on prices. But that's not happening now.
The next column reveals the percent of homes that sold over the asking price in each month. Feb 2022's peak of 83% meant that 83 out of 100 listed properties had bidding wars. That's staggering, and led to massive price appreciation. Feb 2023 and March 2023 showed steady month over month increases in multiple Offer competitions. In a down market like we had after Feb 2022's crash, sellers and seller agents backed off the practice of intentionally under-pricing properties to generate bidding wars. Many agents who continued the practice during the collapse were frustrated by the lack of bids and the low prices of those few competing Offers. Consequently, they terminated the listing and relisted the home above true market value and waited for one good buyer, who rarely showed up.
After prices bottomed in July 2022, it took a few months before buyers realized prices were no longer trending downward, and after Tiff Macklem signaled a temporary pause in raising the overnight bank rate, some buyers felt now was the time to make their purchase. Agents in higher demand areas began to re-introduce below-market listing stratagies in hopes of eliciting decent multiple Offers. At first, Offers came in but none had excessive prices, plus most were conditional. The winning bid was at a price commensurate with current market values. Nothing exorbitant. But over the last two months, it became evident that competing Offers were being won with winning bids over market value, and without conditions. However it's still a mixed bag out there. Some properties generate exceptional buyer interest with heightened pricing, while others languish.
As a side bar, the City of Toronto saw 35% of all sales prices over asking in March 2023. I just checked sales in Toronto for the first 3 weeks of April. 43% of all sale prices were over asking. That's a significant bump in buyer activity. The thing we don't know is if summer months will see a downturn in buyer demand. Time will tell.
Average Days on Market has been dropping over the last 2 months (see the 2nd last column). This indicates buyers are snatching up properties at a faster rate.
The last column is Months of Inventory (MOI) which is calculated by dividing active listings at the end of the month (which is the number of listings that didn't sell up to month's end) by the number of sales for that month. This calculation is asking how many months will it take to sell off all the active listings at the sales rate of that month. For example, if June had 10,275 active listings (total number of unsold listings as of June 30th), and June had 4,623 sales, then June's MOI calculation wants to know how many months it would take to sell 10,275 active listings at the rate of 4,623 sales per month. Simple math. Divide 10,275 active listings by 4,623 sales. That equals 2.2 months. In other words, it would take 2.2 months to sell 10,275 active listings (inventory) if there were 4,623 sales every month.
The lower the MOI, the higher buyer demand there is which can have upward pressure on prices. The higher the MOI, the less buyer demand which can cause prices to fall. Jan 2023 saw 3.0 MOI; Feb 2023 had 2.0 MOI; and Mar 2023 fell to 1.5 MOI. Buyer demand has been increasing.
Now that you know how to examine some key stats, find the city or town you live in from the tables below (sorry, not all towns were included). What observations can you make? How does your city compare to others? (I'll keep adding upcoming month's numbers to the following tables so you can see how your city or town does throughout 2023). FYI: The peak of average prices occured in February 2022 when All TRREB areas were averaged out. However a small number of cities and towns saw average prices peak in Jan 2022 or Mar 2022, which is reflected in the tables below:
