The release of June 2022’s market watch by the Toronto Regional Real Estate Board saw sales drop 41.4% versus June of last year. New listings increased by 1% but this figure is overstated (more on that in a separate blog post). Active listings rose to 16,093, an increase of 42.5%. The average price climbed 5.3% to $1,146,254. And properties took an average of 24 days to sell, versus 17 last year June.
With professional and amateur media publishers calling for market correction on the conservative end, and a market crash or bubble on the extreme end, we have to ask ourselves if the current market conditions and performance indicators lead to one or the other happening — or if this is just a ‘normal’ market?
I got my real estate license in 2003, when it took about a month to sell a house, there were three months of inventory sitting on the market (which indicates a balanced-to-buyers market), homes didn’t sell for over asking price (they average 97% sold to list price), and a sales-to-new-listings ratio at about 60% (six out of ten new listings in a month would sell). The average price would touch the $300k’s that year, and there was no Instagram or TikTok where dancing real estate agents would be pushing their market facts to an eagerly devouring audience. To me, this was the benchmark of a ‘normal’ real estate market because it was the first market I knew.
There were certainly different markets before that, the most infamous one being the run up of prices in the late 80’s to early 90’s, leading to an eventual decline of real estate prices and a flat market for over a decade (and maybe two if you factor in inflation).
As human beings, we have a recency bias and look at the most recent happenings to define what’s happening around us. We remember the most recent increase rate hike of 1 basis point (which is a 66% increase by the way from 1.5% to 2.5% on the key Bank of Canada rate). We see “lots” of homes being listed around us and not selling. Buyers fear entering the market because they think they may pay too much and end up losing money (but they were driving prices up in multiple offers when there was low inventory just a few months ago). And so we think this market is crashing.
We are certainly faced with many things in this current time period that we didn’t see in the past two more more decades. These are factors outside of our control that are happening simultaneously, namely: a global pandemic, inflation which increases our cost of living, the war between Russia and the Ukraine, the Bank of Canada increasing interest rates which affects our ability to borrow money — and this is all happening at once.
So it’s a bit tough to conclude that amidst all of these things happening, we’re entering a ‘normal’ real estate market. But if we look at the actual data the real estate market is indicating… are we simply entering a normal real estate market? Or could things actually get worse?
When I reminisce and look back to when I first got licensed 19 years ago, I wouldn’t have imagined real estate prices would increase almost four times the average price of 2003, while the number of homes for sale would be similar and sitting in the 16k range (2003 saw anywhere between 16k to 23k homes for sale).
The cancel and relist procedure is understating the number of days on market an average home takes to sell, so simply pulling from the stats, you’d see a home sell in 15 days — but actually it’s closer to 30 right now… which is similar to 2003.
The biggest difference I’m seeing with this market is the sentiment of home buyers, and the worry of sellers and investors. The Bank of Canada is expected to announce further rate hikes over the next few months, which drastically erodes purchasing power of buyers entering the market leading to home prices declining further.
We haven’t seen inventory increase to levels as high as previous years, namely during the inventory peak of the October 2008 market when it sat at 28,473 listings (interestingly enough this was when I bought my first home), and the 25,148 listings we saw in the May 2010 market.
As for home prices, June’s average price is 14.08% lower than the peak February average price of $1,334,166. When you compare where we are today versus the most recent jump up in prices in the 2017 market, we’re up 24.85% compared to April 2017’s average price of $918,130.
Where is the market headed? Are we seeing a correction to a more normal annual price growth? Or will we see a crash? I added a trendline (in red) to the average price graph and you can see just how much the average price growth veered away from a normal annual price increase level in the recent months particularly during the pandemic period which started in spring 2020.
A market correction would bring price growth to more conservative levels, which averages 7.47% per year since 1996. Sure, you could call this a crash — but what is your definition of a market crash? Is it when prices drop 30% (we’re not there… yet…)? Is it when sales are dropping 40-50% on a year over year basis? Is it when we start to see a lot of foreclosures and homeowners giving up their houses because they can’t pay for the mortgage?
We’re seeing a return to a normal market — for now. Average price growth won’t be as high as previous months and years. We may even see home prices dip below 2021 levels by the end of summer or early fall.
And that’s okay.
Real estate is a long term investment. You’ve got to live somewhere. And when you look at any time year time span and if you had bought and held onto your home for at least that time period, you wouldn’t have sold for less than the price you bought your home for (excluding factors such as inflation and depreciation).
You need a place to live in. You’ve got a choice between renting and buying. And if you’re renting, you’re paying for the mortgage of the person who owns the property you’re renting.
Don’t fear a market crash. Look at real estate with a long term perspective of building equity and wealth. Sure — keep watching the scary Instagram reels and TikToks (and YouTube videos) about the market crashing and the housing bubble bursting. But do your research as well and look back at the history of real estate and you’ll realize that these short term scary moments don’t last for long.
Photo by Dillon Kydd on Unsplash
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