How many people got burned by the 2017 correction?

Thursday Mar 01st, 2018


[Note: the analysis from this blog post was referenced in a Globe & Mail article in March of 2018.]

The calendar just turned from February to March. That means February real estate statistics will be released next week. And that means we're going to be seeing harsh year-over-year (YoY) price comparisons for the next few months. If you want a fun drinking game, have a shot every time you hear or read the media use any variation on the word "plunge" related to prices.

Yes, prices dropped a lot from their spring heights, and it was an overdue "regression to the mean" as they couldn't keep going up 10% or 20% a year. There may be further regressing to come in the form of some sideways prices or even another correction, but what this post is about is getting away from sensationalized headlines about falling prices and looking at how many people actually got "burned" with the purchase price of their Toronto house or condo?

First off, prices are NOT plunging

For sure they plunged, but that was from April to July last year. See below:

But the thing is, now that we're in March 2018, July 2017 was 8 months ago. If you look at the average 416 house price above, you'll notice that it has stayed within $70K of $1.2 million for 8 of the last 9 months (only exception being July 2017 at $1,088K. I'm including February 2018 in that because I'll guarantee you average prices rose in January (they have the last 21 years in a row now, to an average of 9.2% month-over-month. Actually a 9.2% inrease will take it outside of that +/- $70K spread because that would take it to $1,315K.

But look at the chart above again and notice that the price fell was pretty much just a give-back of the spring run-up. Prices are still well above 2016 levels. So again, prices are NOT plungING - they already plungED and that was 8 months ago now, so it's old news.

It's less worse than you think

That chart above was for all freehold house types combined (i.e. detached, semi-detached and row/townhouses). The chart below shows the Home Price Index for four different Toronto (416) home types. (See this explanation on the HPI if you're unfamiliar how it works.) Note it's a bit smoother. Scale is different too (0-1400 instead of 600-1600). The main reason the HPI is smoother is because it eliminates the effects of the mix by using a benchmark home with specific attributes (e.g. 3 bedrooms, 2 bathrooms). When the market doesn't look so hot and Bridal Path mansion owners decide to wait out the market before selling their house, it won't affect the HPI because it's just tracking 3 bedroom, 2 bathroom homes (for example). But if last year 2 Bridal Path mansions sold in the month and this year there were none, that' going to bring down the average price.

The triangle was the peak month for each home type. The number on the right above the little square is for January 2018. For this analysis I looked at the most recent HPI benchmark (square)  then looked to see what months were over $10K more than the current price (that was a lot of money in 1962, but with today's prices that's almost a rounding error). Those months where the benchmark prices are higher than the current benchmark are bookended by the circles.

Here are the numbers in table form. The months shaded yellow are the ones between and including the circles above - where homeowners might be disappointed with the price they paid, as it is $10K or more above the current benchmark price. The spring peak month is bolded.

Notice that all housing types are higher than the they were a year ago, and all are ate least 23% higher than two years ago.

How many buyers got "burned"?

First of all, if the buyers are buying to live in a place for a longer term, they may not look great on paper now, but they're going to be fine in the long run. Whether if it's the stock market or owning a house, if you can't withstand some ups and downs then maybe it's not for you. (If you can't stand the heat, then you shouldn't buy a kitchen?) But if we want to determine how many might be unhappy with their purchase price currently, we would count the yellow months (benchmark price >$10K over Jan 2018) we get 8 months for SF (single family) detached, 5 months for SF attached, and 4 months for townhouses.

Now I looked up the number of 416 transactions in those "unhappy" months for each of the benchmark housing types, and then divided by the total 416 housing stock, which I got from Statistics Canada.

Here's how that shook out:

There were less than 9,500 transactions across all of the affected months (and none for condo apartments), and that works out to about 1.3% of homeowners. Or in other words, nearly 99% of Toronto homeowners are not sweating last year's market correction. By building type here are the unhappy owners (Lowrise above is the total of detached, attached, and townhouse):

I ran the numbers using <$10K difference as the neutral breakpoint, just because it would be normal to expect some value fluctuation in a house and $10K is pretty small on the house prices we're dealing with today. But just in case of skeptics, I added in the transactions for the months that are even $1K below current HPI benchmark prices. The number of happy homeowners declines from 98.7% to 98.3% (it added less than 2,900 transactions - though detached houses were still $25K below Feb 2017 benchmark prices and they averaged just under 800 transactions a month last year).

My conclusion in two songs

1) Don't believe the hype 
2) Don't worry, be happy ☺ (unless you were a flipper or a speculator with a short time frame in which you wanted to make a profit)

(Note my analysis, as per usual, stuck to the 416. I'm sure if I ran similar numbers for parts of 905, the unhappy numbers would be higher.)



About Scott Ingram CPA, CA, MBA

Would you like to make better-informed real estate decisions? I believe knowledge is power. For that reason I invest a lot of time researching and analyzing data and trends in the Toronto real estate market. My Chartered Accountant (CPA, CA) side also compels me to perform a lot more due diligence on properties my clients are interested in purchasing. If you have better information, you should have less risk and be in a position to make better decisions for your hundreds of thousands of dollars.

Your home is the single largest investment you'll make - trust it with an accountant.

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