Jul. 23, 2009

Canadian Real Estate Market: Better Times Ahead

The real estate bubble in the USA exploded about two years ago. As a result, people participating in the real estate market in Canada came up with a demand: "How will the circumstances in real estate in Toronto or Canada be developing from now on?"

There were two basic motives for this uncertainty. First, Canadian real estate market, as our whole economy, has powerful attachment to the situation in the USA. The second reason is originating from the progress of the property market in Canada between the years 2006 and especially 2007. The situation indicated a likelihood for a similar bubble to develop here. Now let's look at the situation almost twelve months later.

The way how things were developing between 2008 and 2009 didn't really appear too good, which only reinforced all the negative prophecies and only a few people still managed to keep their confident viewpoint. If we look at the monthly year to year sales statistics, we can identify a clear fall with its peak in January 2009: -47% compared to the same month last year. So it's apparent that the "depression panic" from fall 2008 has reached Canada. No wonder that most people were reluctant about making any important financial decisions, resulting in the property market almost coming to a halt. Under these circumstances, some “experts” foretold Canada facing similar collapse as in the USA. However, the reality is quite different. Let’s examine the 2009 figures.

Number of sales and year-to-year change

These are the most characteristic and closely watched indicators. Looking at these indicators, it is evident how the market froze in during the winter months. However, the sales in June sprang to more than four times of the volume in December. May was the first month in this period when we observed sales growth (compared to the same month in previous year) and June's +27% indicated the Toronto housing market is back on the horse.

Days on market

Another important indicator. While the previous ones draw the bulk of the market, Days on market show us the speed and freshness. These are important characteristics, since if we had only the whole market volume numbers available, we wouldn't be able to predict how long any property would be out on the open market. It is like another side of the same coin. In January, during the most problematic times, an average home stayed on the market just 14 days longer. Confronted with South Florida or Detroit, where days on market value got close to 120-150 days, our slowdown was ridiculous.

Active listings flow change

This figure indicates the mood of the real estate market. It is based on observing the number of new listings on the market. If the home owners are scared that their property price would decline and they want to save their investment, the inflow is naturally growing, while the opposite situation is generally considered as a favourable time to buy property. The future of other market's attributes can be predicted from the active listings flow change. For instance the positive change after January was seen as a market turn signal.

Average price

This one usually attracts the greatest attention from my real estate clients. Usually, one of the biggest items on people's property list is their home, which means that every market change can result in the owner getting thousands of dollars more or less. When the prices declined in autumn 2008, already the next April they rose back and higher.

Why is the market doing so well?! Even now, pessimistic news about the state of our economy are printed almost daily. So why has such a quick recuperation of the housing market occurred? We can find two basic factors:

1. Failed expectations

Many Canadians observed the collapse of US housing market and presumed the same scenario at home. However, what is crucial to emphasize here is the fact that the problems in the USA originated from the subprime sector. Few defaults at the beginning caused a chain reaction. It started with a price decline, and as a result foreclosures and short sales were not covering all the toxic mortgages, so the banks were pressed to put even more foreclosured properties on the marked, which decreased the prices even more. I dare to say that Canada has a very healthy financial system, which in cooperation with very limited subprime sector where there are only a few foreclosures occuring makes our real estate market a secure one. Homeowners became aware of this fact very soon and relaxed.

2. Stabilized economy and buying opportunities

Now we will briefly analyze the figures about inflation, unemployment, GDP predictions and interest rates. Real estate market largely depends on this data, as follows from real estate prices explanation. Despite the fact that these figures concerning employment or economic growth could look even much better, we can be quite relaxed: our economy is far from a collapse, it is only slowed down, in a stagnation period. All these facts also helped to stop the winter real estate fuss.

Conclusion and the future

We can say that in addition to enduring the winter depression, Toronto housing market has recovered very quickly and now it is growing again. We can even call the condo resale market as hot now. The previous "one year break" has resulted in low interest rates and favourable prices, which means especially first time buyers can enjoy terrific opportunities. Now it is also terrific time for investors to pick some cherries, as their prices still haven't recovered. Due to the market speed, most homes are now sold during the first month on the market and the selling price is usually quite good. So the vendors can feel comfortable too. On the other hand, slower labor market and pertaining level of uncertainty will hinder sudden price burst and bubble creation in next years. From the exceptional market growth of 27% in June we can tell that the market is trying to get to its previous speed and volume and it is likely to get steady soon. Toronto housing market forms a solid foundation of stability for Ontario's economy in wild times.


Anonymous said...

In a recession, decreased demand will decrease prices and increase quantity demanded back to the pre-recession levels (i.e. increased sales figures in June), which is what your evidence suggests. The glut is self-correcting. However, when we were aggregating data over the last 6-months at CondoCatch.com, we noticed that the vast majority of projects have pushed back occupancy dates. Developers are essentially decreasing today's supply of condos to sell at tomorrow's higher prices. How long do you foresee condo prices remaining low? Also, do you think longer-term projects (occupancy dates of 2012 and after) that offer deep discounts make financial sense for the buyer?

Elli Davis said...

It's natural, but just to some extent...developers have to pay mortgages as well and they can't decrease the supply uncontrolled