The Market According to TREB’s Mercer – Quarterly October 2014
Hello! My name is Jason Mercer. I’m the Toronto Real Estate Board Director of market analysis. We are three quarters of the way through the 2014, so I think it will make sense to take a few minutes to look back and to see what we have had in terms of sales, average price growth, and how that is differed between different market segments.
At the same time, we also want to look forward both through the end of 2014, but also through 2015, as well. This first slide shows the sales through the first three quarters of the year for each year between 2004 and 2014.
Now, if we look at 2014 in green, we see we are more or less neck and neck with the record level of sales that we saw back in 2007 shown here in red. There is a key reason for this.
We continue to see an affordable situation in terms of housing cost, Mortgage Principle on Interest, property taxes and utilities. And so, we have continued to see a lot of would-be home buyers looking to purchase a home. In fact, if we had seen more listings in the market this year, we likely would have been on a pace for a clean record in 2014.
Moving on to the next slide, what we see here is year-over-year sales growth.
It is interesting to note that the strongest market segment in terms of the sales growth has been condominium apartments. This is a segment of a market where we have seen a lot of listings come online.
But at the same time, we have seen a lot of buyers who looks like have been waiting on the sidelines looking for some of these projects to complete. And when they complete and we see these units listed for sale on Toronto MLS, we have seen a lot of these buyers move in to the market and absorb these units.
Conversely, if you look at the low rise segment of the market, there are purple bars on this chart: detached, semi-detached, and town homes. We have not seen as strong a sales growth. That is not due to lack of demand. That is more due to lack of listings.
So, there are a lot of households out there that just have not been able to find a home that meets their needs. There has been a lot of competition between home buyers for those detached homes and some neighborhoods throughout the city of Toronto and the surrounded regions as well.
This discussion of competition between buyers brings us to price growth. If we look at this first slide dealing with price it shows us the average price through the first three quarters of the year, again between 2004 and 2014.
We see that over that span of time, we have seen enough competition in the market place to see steady upward pressure on the average price growth. Price growth this year has been even stronger. That is as a result of those conditions that we have seen in the low-rise side of the market.
So again, single, semis, and townhomes, where there has been a constrain supply of listings in some parts of the GTA region. As a result, we have seen more grasp upward pressure on the average selling price from that segment.
The next slide shows us the average year-over-year price growth through the first, three quarters. It is almost the exact opposite of what we saw in terms of sales. It is the low-rise segments of the market that are driving these grows.
High, single digit price growth for detached, semi-detached, and town homes, whereas if you look at condominium apartments, which has been the better supply segment of the GTA housing market. We are more, sort of the, mid-single digit mark.
That reflects again, the not quite as much competition between buyers, obviously because we have seen these units complete. That is a nice Segway into the condo segment of the market because I would like to cover that off in a little bit more detail.
Certainly, what we have seen in over the last three years is a lot of cranes in the sky and a lot of discussion of record number of units under construction. At the same time, certainly 2013 and 2014 as well, we are looking at record levels of new condominium apartment completions.
While it is true that we have seen a lot of completions in the condominium apartments segment over the last couple of years, it is important to know that while we have seen this supply come in to the market place as investors held units have been listed on the Toronto MLS system, it is important to know that market conditions have actually tightened over the last year. This is evident when we look at months of inventory.
So, the purple line on this chart represents months of inventory from the condominium apartments segment. The first thing we notice is indeed, the condo market segment is better supplied than the low-rise side, where we are seeing actually our record low in terms of months of inventory.
At the same time, moths of inventory for condos were higher. It is actually not at the highest point that it has ever been. As I said, things have actually tightened up in the market place over the last year.
We can look at the relationship between demand and supply, and price growth in another way. That is on this next chart when we look at the sales-to-new listings ratio juxtaposed against average annual price growth.
Again, when you see the sales-to-new listings ratio spike to the high side, we have seen very strong price growth in those periods of time. Of course conversely, when you see that sales-to-new listing ratio move lower, we see a more moderate pace of price growth. Or even in some situations, we have seen the average price go down on the year-over-year basis.
Right now, we are seeing a sales-to-new listings ratio, more or less in a balanced state. That is why again, we are seeing that average annual rate of price growth somewhere in sort of the mid-single digit mark.
Just a sort of cap off for the discussion on the condominium apartments segment, certainly we have seen more units come into the market place through a record level of completions, both in 2013. It looks like we are set for a new record in 2014 in terms of completions, as well.
But what we have seen is buyers were on the sidelines waiting for these projects to complete, and waiting for these listings to come on to the market place. In which case, they move off the sidelines and start to buy these units in order to live in them.
We have talked about the first, three quarters of 2014, both in terms of the market as a whole, all home types over that period of time. We have also talked about the condominium apartments segment, in particular.
Now, I would like to look forward to think about what we expect to see in terms of sales and price growth, both through remainder of this year, and also through 2015 as well. And so, when we are thinking about sales, it is important to think about affordability because most people purchase a home in Canada and indeed, the GTA through the use of a mortgage.
All the market consensus view is for a slight uptick and boring cost over the next year or so. It is important to point out that we have seen some heightened economical certainty, both on Europe and seeing through the United States as well over the last few weeks.
That could suggest the bond yields could in fact, move lower if this economic uncertainty is sustained. Again, while the consensus view is for a slight uptick. It also would not be surprising to see bond yields remain somewhat flat.
Of course, that would mean that we would not see much movement at all, in terms of mortgage rates. But let us go with the consensus view right now, and think about what that means in terms of affordability for home ownership and the Greater Toronto Area.
If we look at TREB’s affordability indicator, what we are calculating here is the share of the average household income that is going towards Mortgage Principle of Interest, property taxes and utilities, associated with the purchase of an average priced home.
Certainly over the last few years, we have seen the share increase, booth because of rising home prices and also because of an up-tech and boring cost, as well. If we look forward to what we expect to see for 2015, assuming that we do see that, say, 25 to 30 base point increase in boring cost, as well as a further modern increase in the average selling price, we are going to see that share inn around, say, 36 to 37 percent.
While that is higher than what we have seen over the last few years, it is still below the Federally mandated ceiling of 39 percent. On top of this, a lot of home buyers will be benefitting from a significant discount in boring cost off the posted fix rate.
Obviously, that would lead to a lower share of income going towards those major home ownership payments as well. At this is mind, we can now think about what we expect to see in terms of home sales through calendar of 2014 and calendar of year 2015.
I am quite optimistic about a strong fourth quarter of 2014, and so I am expecting to see sales level at or even a little bit of the record that we saw back in 2007. Again, that is just base on the solid affordability picture that we have seen so far this year.
Moving in to 2015, I do expect to see a slight uptick in sales to about 95,000. And so, we will see stronger sales in the first half of the year as we see the handoff from 2014. But then, we will see a bit of a pullback perhaps, in the second half of 2015, as the upward trending affordability indicator starts to have a bit of an impact with some households perhaps, moving to the sidelines.
Thinking about price growth, I am expecting to see both continued strong price increases through the fourth quarter of this year. We will finish off 2014 with an average price of $565,000, representing an eight percent year-over-year increase.
A lot of this increase, again, will be on the back of low-rice home types. Single, semis, and town homes were experiencing very strong competition between buyers. As we move in to 2015, I expect further price growth up to an average of $590,000 next year.
Now, that will represent about a four and a half percent increase on a year-over-year basis. A little bit more moderate than what we saw this year. And again, some of that will have to do with a little bit more supply of listings coming to the market, both on the condo side, but likely on the low-rise front as well.
Also, we may start to see a little bit of a flattening note in sales in the second half of next year, as some buyers move through the sidelines, and as affordability indicator trends upwards a bit further.
With that, our outlook is complete. I look forward to speaking with you again in the New Year. Thank you very much!