A significant sales decline amounting to 44.1% less than September 2021 is bound to make news headlines everywhere for real estate bears and market pessimists. The most interesting detail to note about the most recent market report published by the Toronto Regional Real Estate Board is a dip in average price, amounting to 4.3% compared to last year.
This is significant because, for the first time since the first dip when the pandemic started and lockdowns happened, the year-over-year average price has declined (and not just the month-to-month price). For buyers — is this something you should worry about? And sellers — should you panic and list your home for sale?
Let’s have a closer look at what’s happening with the real estate market.
Real estate prices showed an aggressive upward trajectory culminating in a 28.59% year over year increase when comparing January 2022 to January 2021. We identified this as the most recent peak in prices. February saw a 27.77% year over year increase, and subsequent months saw lesser year over year price increases while month to month price comparisons dipped into negative territory starting in March when we saw a 2.6% decline when compared with February prices.
When you look at this on a price chart, you’ll see that the average price growth was unsustainable to begin with. Low inventory, coupled with low interest rates, high demand, and FOMO buying during the pandemic period led to unusual price increases that deviated far from a sustainable level.
The result? A mass frenzy of buyers competing in multiple offers, outbidding each other, vying for scarce property and, in hindsight, overpaying.
What happens when interest rates started to rise?
Affordability became affected, buyers had a fear of over paying, and they bowed out of the market, resulting in the number of listings starting to increase.
When supply exceeds demand, prices drop.
When buyers can’t afford to pay as much due to higher borrowing costs, prices drop.
Both of these factors contributed to month-to-month price declines, flat price growth, and now a negative year-over-year price movement.
It shouldn’t come as a surprise that this happened — it was bound to especially with the government aggressively increasing interest rates to cool down inflation.
The question is — how long will prices continue to drop?
Is it possible that prices could remain steady… or even increase?
Will spring 2023 average prices be higher than fall?
Let’s investigate further.
With the aggressive price growth we’ve seen in 2021, a crossover of average price from positive territory to negative territory was unavoidable. It is likely that the next several months will see negative year-over-year average price comparisons due to the fact that interest rates will continue to rise and affordability has been affected.
Simply put, a buyer can’t pay the same price today with the high interest rates they face compared to what they could have paid and afforded a year ago. Therefore, prices will drop.
The interesting part of this equation that could see prices stabilize (flat or sideways growth rather than aggressive downwards decreases) is the supply side or inventory of listings on the market.
Historically, we are not seeing that many homes listed for sale on the market.
Why?
Seasoned homeowners are staying put. Where would they go? And why would they give up on a home that may likely be paid off, or have a small mortgage remaining, to purchase a home that is higher priced in today’s market (relative to, say, five years ago) with a much higher interest rate? It doesn’t make financial sense.
The supply of new homes remain scarce. Yes, pre-construction condos and freeholds have begun to enter the market, but many investors are keeping them as rental units (in an ultra competitive rental market) so we’re not seeing a lot of new homes and condos being introduced into the resale market.
Immigration continues to increase population, resulting in a sustained (albeit low) sales level that is still eroding the amount of available inventory.
And the fact that new listings is overstated as real estate agents practice ‘cancel then relist’ which inflates the actual number of new listings being introduced into the market.
With such aggressive rate increases, we should have seen a much more profound price decrease than we’ve seen — and who knows, this could still happen — but tight inventory levels especially in high demand neighbourhoods (where multiple offers and competing bids are still happening) are holding prices to a certain price floor that hasn’t been broken.
Historically, spring real estate prices jump above the peak fall prices. But with additional interest rate hikes anticipated, will we see spring 2023 prices lower than fall 2022?
The answer lies in how much inventory we see introduced into the market over the next few months.
If we see a decline in new listings, steady sales (when compared seasonally since we should expect to see sales taper late fall and into winter), and a lower number of active listings introduced to the market, we will likely see a stabilization of prices.
Seasonally, prices will decline a bit more before picking up an increase towards peak spring market. This is affected by the types of homes being listed and sold on the market (higher priced homes sold in the spring tend to pull the average up, whereas these same homes typically don’t get listed and sold in the middle of winter).
What should you do as an active buyer and seller in this market?
Buyers should manage expectations — be prepared to compete in high demand neighbourhoods, though you’ll be paying a lower price than peak 2022 that’s for sure. But in neighbourhoods where there are more competing listings available, go ahead and haggle for the price you want to pay.
Sellers shouldn’t wait for prices to continue to drop. Either stay put (take your property off the market and sit tight for the next market opportunity to make your move), or adjust your price downwards ahead of the price declines rather than chasing the market downwards while competing listings sell before yours.
There are opportunities in every market. And if you aren’t sure what that opportunity is, or why you should transact — just stay put. Be patient and watch the market movements transpire. There’s nothing wrong with renting for a few more months until you’re confident with your move. And there’s certainly nothing wrong with deciding not to sell your property if you’re not getting the price you want for it.
Base your decision on what you need (and maybe what you want). Be clear and certain about what your expectations are. And understand the dynamics that are affecting the current market. Buying and selling in the same market conditions (especially move-up buyers) present a great opportunity right now, since you’re sitting on equity gains that you have accumulated over the years and that much larger property you covet has dipped in price.
Know what you want to do and understand the market so you can make the right decision.
Photo by Andre Gaulin on Unsplash
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