It’s official – it was a strange spring season for Toronto’s usually bustling housing market.
While the region appears to be recovering from the 20% to 30% sales plunges that followed last April’s Ontario Fair Housing Plan, conditions were stubbornly subdued in the period between March to May – typically the busiest time of the year for home sales.
In fact, the declines over the spring season were so steep, they pulled down the Canadian average, leading to a nine-year low for that three-month period, according to the Canadian Real Estate Association.
Indeed, fewer than 8,000 homes changed hands in each March, April and May, posting year-over-year declines of 40%, 21%, and 22%, respectively.
Is a turnaround in sight?
While the latest report from the Toronto Real Estate Board indicates a more promising trend to come with June posting the first positive year-over-year growth this year, much of that modest 2.4% uptick is due to the market aligning to post-FHP conditions, rather than being compared to sales peaks prior to last April.
However, the 8,082 homes that changed hands in June is a tepid improvement from the 7,843 in May which could indicate stronger seasonal conditions.
Meanwhile, all of the underlying fundamentals for market growth – such as migration, job creation and wage growth – remain strong in the region. So why have slower conditions persisted through the warm weather months – and what could cause them to turn around?
Sellers waiting out slower prices
While the analysts from TREB continue to pin the blame on the psychological fallout from the FHP, they point to a key metric in their June report that’s exacerbating the market further – a lack of supply. The number of homes newly listed for sale fell 16% from May, and came in a whopping 18.6% below last year’s levels, when the market was fully immersed in post-FHP volatility.
Much of this could be due to sellers who are hesitant to list during a perceived pricing downturn; the average home price ticked just 2% higher year-over-year in June. That’s a scant drop in the bucket compared to the massive 33.2% increase recorded last March, which prompted policy makers to take action with the plan in the first place. It remains to be seen how long sellers will wait to re-enter the market, which will continue to depress overall sales activity.
The mix of home types is shifting, again
Before the FHP went into effect, detached homes were the highest-sought, inflating prices well above the $1 million mark and prompting frantic bidding wars on a regular basis. That changed abruptly, however, following the FHP – suddenly, single-family home types bore the brunt of the sale slowdown with 30% fewer changing hands.
Condo sales instead led the market over the following months, posting the only year-over-year price gains between January to May. However, the tide began to turn again in June, with the annual price gap narrowing considerably for detached homes at just -1.9% (compared to -17% in March). Semi-detached and townhouses also posted their first positive price gains on the year, at 1.7% and 3.2%, respectively.
While condos continue to be strong, with prices up 7.9%, there have been signs of buyer fatigue; sales have slid 5.3% as prices have surged to an average of $561,067 throughout the TREB region, deteriorating what was once the most affordable entry point to the market.
While detached home prices remained at a hefty average of $1,033,574 in June, that’s several hundreds of thousands lower than the norm in 2016 and the first half of 2017, perhaps prompting previously priced-out buyers to make their move.
The market continues to adjust
While slight signs of recovery are promising, the elements that slowed the market in the first place continue to make an impact. While the FHP has now had a year to be absorbed by the market, further flux has been introduced by new mortgage qualification rules introduced by Canada’s banking lender. These new financing hurdles effectively require borrowers of new mortgages to qualify at a rate that’s roughly 2% higher than their actual mortgage rate, “stress testing” their ability to make their payments should economic conditions change.
This continues to be felt strongly in the market, especially in combination with rising interest rates and increased trade uncertainty, says the CREA’s Chief Economist Gregory Klump.
“This year’s new stress test became even more restrictive in May since the interest rate used to qualify mortgage applications rose early in the month,” he says. “Movements in the stress test interest rate are beyond the control of policy makers. Further increases in the rate could weigh on home sales activity at a time when Canadian economic growth is facing headwinds from U.S. trade policy frictions.”