Why I don't think we're in a buyer's market yet
Tuesday Jul 18th, 2017
There have been a bunch of recent stories in the media about how we're now in a buyer's market. I just did a Google search for "Toronto buyer's market" in news, and voila:
The year 2016 A.D. will go down as a hot year for Toronto real estate. Year-end average house prices in the 416 were up 22% over the previous December, which was the second highest gain in the last two decades (behind 29% in 2007). Average condo prices were up 16%, the third highest gain in the last 20 years. Then things just got wilder in the first quarter of this year: by the end of March those year-over-year gains were 33% for houses and 31% for condos. Months of inventory (MOI) was at all-time lows, sales were way up - especially for condos, 70-80% of properties were selling for over the asking price, etc., etc. I've been classifying that early 2017 period as an extreme seller's market.
And then the Ontario Fair Housing Plan was introduced
Let me say straight-up I think buyers were overreacting in the first quarter of the year. Whether it was pure FOMO or that combined with other factors, prices rose way more than what was rational through April. From December to the end of February the average 416 house (mix of detached, semis, rowhouses) jumped $273K. In. Two. Months. Over the entirety of 2016 the average house price "only" climbed $210K. And condos buyers were out of control too. The first three month-over-month (MoM) price jumps of the year were $39K, $38K, and $27K. For perspective, only 3 full years in the past 20 had condo price gains of over $30K. So people overreacted on the way up, and now I think they're overreacting on the way down.
To recap, the first few months of the year were crazy, reaching a peak during March Madness. Some prices and stats actually peaked in April, but looking on a weekly basis, you could see a shift take place mid-April (likely timed with buyers pausing to see what measures the Ontario provincial government would announce on April 20th). The shift (away from the extreme sellers market of Q1) accelerated through May. In June that market downswing continued, but I saw signs in the latter half of the month that some indicators that had been worsening by the week had leveled off. You can read my run through the June stats here, which link to the full set of market charts available as a SlideShare report.
So definitely the market has shifted away from the extreme seller's market of early 2017.
The question is "How far has it shifted?"
Some are calling it a buyer's market, as if a flip was switched. To me this large complex market operates more like a pendulum and I'm saying it has not swung as far as buyer's market territory. Again, it is definitely moving away from extreme seller's market territory towards buyer's market.
To show you what a true buyer's market looks like, I looked back to the last negative year for houses in the 416, which was 2008. You will of course recall that was the year of US federal bailouts and the Lehman Brothers bankruptcy in September.
For the following charts I will look at just detached houses and just in the City of Toronto (the 416). In the 10 months up to and including June 2008 the average price was over the $600K mark in 7 of them. Then the market slumped and stayed under $600K for 10 straight months. That was the last real slump we've had in Toronto real estate (which is part of the problem around here - many real estate market participants think values can only rise here).
I'd like to compare some current market indicators to the definite buyer's market 2008-09 stats. The months for the Financial crisis start numbering at January 2008 (1) and run until June 2009 (18), so 13 would be January 2009. The months for 2017 are January (1) to June (6).
First, MOI. Many say that a "balanced market" is 6 months of inventory, with below 6 a seller's market and above that a buyer's market. Others say 5-7 months is balanced. The average over the 258 months since January 1996 (how far back TREB's posted monthly stats go) is 2.4 MOI, with a median of 2.2. During the slump, there were 9 months in a row where average detached house prices were negative year-over-year (YoY). That streak started at month 8 (Aug 2008), when MOI was 4.7. As you see here we're currently much lower, at 2.6.
In a hot market, new listings get snapped up quickly is the theory. SNLR is another stat with a theoretical balanced market zone, in this case 40% to 60%. Above 60%, like the first 3 months this year (including the 71.9% peak shown) is supposed to indicate a seller's market. And below 40%, like the September to November 2008, show a buyer's market. Right now were still in the "neutral zone" at 40.5% (albeit near the bottom of the zone).
* Note I don't like this statistic much. The reason is that it's only as good as the underlying new listings information. And TREB's new listing data is way overstated (an agent can terminate an MLS listing multiple times to keep it looking "fresh" so that one property can accumulate 3 or 4 or more "new" listings). I went on a bit of a Twitter rant about this recently. The gist is new listings are overstated right now, so the SNLR you're seeing in recent months would actually be a few points higher if the "new listings" data was cleaned up.
The hotter a market is, the quicker homes sell. The colder a market is, the longer they take to sell. The average since January 2008 is 29 DOM and the median is 28. You can see that in that buyer's market in 2008, DOM reached a high of 44. And currently we're sitting at half the average at only 14 DOM before a house sells. So that doesn't feel like buyer's territory just yet.
* Note DOM are also corrupted by the current rash of terminations and re-listings. If a house is listed for 7 days, relisted for 7 more, then sells in 3 days on the third listing, TREB only counts the DOM as 3 instead of the 17 it's really been on the market. So "real" DOM is actually higher. Prior years would be understated too, but the degree of understatement is higher than usual in recent months.
Sales price compared to list price can be a bit of a bogus stat. It may be more indicative of the popularity of the "underprice and hold offers" strategy than anything else. Still, agents wouldn't be trying that strategy if it wasn't a seller's market. (I track sold over asking statistics on a weekly basis, and they're definitely doing it a lot less frequently now).
But for what it's worth, the average 416 detached selling price in June was actually slightly higher than list on average. You can see it's definitely trending down, but it's nowhere near the 6 months in a row below 96% that began on October 2008.
In the aftermath of the financial crisis, 416 detached houses spent 9 months in a row with YoY price losses. Funny enough, when that streak ended it only took three months for price gains to be +10% YoY. Obviously things have dropped steeply since the March height of 33%, but still at 10% to the positive YoY. So we're not quite in the red yet.
A note about condos
The 416 condo market is actually holding its own right now. For instance, 2017 YTD condo sales are actually up 3%, compared to houses which are down 17%. And though the market stats have pulled back from where they were in March and April they haven't cooled off nearly as much. Read more about it in my June market report, but the largest reason is that condo inventory is still far below normal seasonal levels so that lack of supply is keeping things buoyant.
The reason I chose detached homes to illustrate was to isolate somewhat the problem of sales mix (the proportion of different home types, which can change from month to month), and because detached houses seem to be the home type most affected by the recent run-up, and most affected by the current come-down.
Where will it go from here?
Let me recap the main point I'm trying to make: we're not in a buyer's market. The pendulum is certainly swinging away from extreme seller's market, but in my opinion it hasn't swung all the way into buyer's territory. There are still plenty of signs of a seller's market (MOI, DOM, and the fact 35% of 416 houses still sold for over asking in June). I think we're in the middle territory currently, with some signs of a seller's market, and some signs of a buyer's market.
This is not to say we're not entering a buyer's market. I don't know for sure. Nobody does, no matter how righteous they sound about it on Twitter. Twenty percent YoY price gains aren't sustainable, that's for sure. There will have to be some regression to the mean at some point. Whether that's in the form of a crash, a major correction, a minor correction (what I would call this so far), or a sideways period, something had to give eventually.
A great piece to read and keep in mind as we see the next several months play out can be found here. It's a great walkthrough of the bubble, post-bubble, and eventual crash in the Phoenix, Arizona market by John Pasalis.