Updated January 10, 2009
As the world economy shows signs of serious problems, one cannot help but worry about the state of our real estate market. Greater Toronto Area has seen several years of high activity and prices have been rising steadily since 1996.
2005 was a record-breaking year. 84,145 properties changed hands, the largest number ever recorded by TREB. The average price rose by 6% - a healthy but not excessive amount. In the City of Toronto (E01 to E11, C01 to C15 and W01 to W10) the average price rose by 10 percent to $361,055.
2006 real estate sales did not exceed the 2005 records, but came fairly close at 82,969. The average price increased by a modest 5.4% to $351,941. Last quarter of the year was slower than the first quarter. The number of sold properties was lower by 10.9% than in the first quarter, there were 47% fewer listings taken, but the inventory of available properties was higher by 6.6%. The comparison with the fourth quarter of 2005 is more favourable, with the number of sold properties lower by only 2.6%, 2% more listings taken, and 5.6% higher inventory.
2007 beat the 2006 records. 12% more sales were recorded (11% more than in the previous reccord-setting 2005). Average prices rose by seven percent to $376,236, and the average time required to seel a property went down to 32 days from 34 required in 2006. The number of listings taken in 2007 fell by 1.8%, and the average sell-to-list price ratio stayed constant at 98%. But some of that activity resulted from the new Toronto Land Transfer Tax, which was coming into effect in February 2008 and caused some frantic buying in the last quarted of 2007.
2008 started briskly, with the number of sales just slightly lower than in the previous year, and the average price almost 6% higher than in January 2007. But that pace slowed down gradually, and numbers of sales in the following months were lower in comparison with the same periods of 2007. The sales decreased even more in the last quarter of the year. Average prices were still rising until August, but the higher end of the market seriously slowed down and since September these average prices were lower on a year-over-year basis. That resulted in a year-to-date very small increase in the average price (only 0.8%), which in reality equals a decrease if inflation is taken into account.
There are substantial differences in the average prices between the last quarter of 2007 and last quarter of 2008. In the last quarter of 2007 19,874 properties were sold in the Greater Toronto Area, at an average price of $394,382. In the same period of 2008 only 11,372 properties changed hands, and the average selling price was $359,883.
There are several factors at play that affect our real estate market.
Although the interest rates have risen somewhat, they are still at their historical low, lowering the real cost of purchasing a house, townhouse, condo apartment or loft, at least for the length of the mortgage term. The recent increases have neither dampened the activity down in any significant way, nor remarkably reduced affordability.
Inflation is very low at only 1.97%, and
Young people, immigrants, and foreign investors are fuelling the demand, while older generation stays longer in their homes.
The province imposed a freeze on urban boundary expansions, which means that land prices are bound to increase. Increased land values lead to an increase in property prices. Increases in single family development charges in the City of Toronto will increase the cost of newly constructed housing, which is already suffering from the higher materials and energy costs. New Toronto Land Transfer Tax fuelled some frantic activity in December. That activity may slow down in February, when the new tax comes into effect.
Real estate remains a sound investment. In the last 11 years, since the end of March 1996 (the lowest point in the recent years) the average value of a house in Toronto rose by approximately 90 percent. In contrast, the increase in average house price in just 5 years between 1984 and 1989 was an astonishing 168 percent. Houses were often re-sold several times each time selling for a higher price. Such frenzied market had to burn itself out. If we take into account inflation, average house prices have not reached yet the 1989 level. They are 8.2% lower than the inflation-adjusted average of $410,369 of 1989.
Experts predicted that in 2006 in Toronto we should see a slow-down in the number of properties being sold, with that number falling down by about 4 percent, but with the prices still rising by an average of 4%. In reality, the number of properties sold was lower by only 1.4%, and the prices increased by close to 5%. The high level of home ownership was the main reason quoted for the expected slow-down, additional reasons being the rising interest rates and other costs of home ownership. Although the TD Bank economist predicted a stron market for 2008, the new land transfer tax and the economic crisis slowed down the sales, especially in the higher price range.
Using average house prices from just over 50 years, corrected for inflation (for comparison purposes I brought the historical data up to today's equivalent values), I produced the following graph. The average prices are courtesy of TREB.
As you may see on the graph, during this time span there were two significant 'spikes' in house prices, and three 'dips'. Blue line denotes the trend. Each time the average prices rose above the trend line a 'correction' ensued. We can see that correction on the graph below as a result of last year market conditions.
At the end of 2003, when the average house price reached $293,067 (which, corrected for inflation amounts to $310,502, the price line has crossed over the trend line. But the increase rate was moderate, at 7% for a year-to-date average, and, hopefully, the present correction will be more of levelling off the prices, similar to the period between 1957 and 1964.
When the prices rise faster than the trend suggests, the market eventually slows down. Whether the prices become stable, following the trend line, or actually drop, seems to depend on the speed with which the price increases happen. The steeper the angle of the curve representing house prices, the more likely is a price 'correction'. If the interest rates continue rising, the affordability will erode and the demand will slow down.
Price increases since 1996 are much more gradual and follow a much gentler curve than the ones leading to the past two peaks of 1974 and 1989. In the long term the average real estate prices seem to follow the trend line.
