Sales volume crashes, prices plunge from April peak.
In the Greater Toronto Area, sales of homes of all types in July plunged 40.4% compared to July last year to 5,921 transactions. By type:
- Detached houses -47.4%
- Semi-detached houses -38.6%
- Townhouses -36.5%:
- Condos -30.5%.
At the same time, as sales volume was plunging and potential buyers were staying away in droves, the number of new listings rose 5.1%, according to the Toronto Real Estate Board. This left total active listings 65% above the level a year ago.
“Clearly, the year-over-year decline we experienced in July had more to do with psychology, with would-be home buyers on the sidelines waiting to see how market conditions evolve,” said TREB President Tim Syrianos. Alas “psychology” is precisely what causes house price bubbles – not fundamentals, such as 2.3% annual wage increases. And when that “psychology” turns, it pricks those bubbles.
And prices reacted. The TREB refuses to publish median prices though it has the data. It publishes its own proprietary Home Price Index based on “benchmark” prices – a theoretical price based on an algorithm that creates theoretical homes in various neighborhoods. And it publishes the average price.
Home prices had surged through April. The market was going nuts, with year-over-year price increases of over 30%! In April, the average selling price in the Greater Toronto Area (GTA) soared to C$920,761. But that home-price peak in April is now a distant memory.
April 20 was the day the government of the Province of Ontario announced its “Fair Housing Plan” – a laundry list of measures, including a 15% levy on foreign speculators – to prick the house price bubble in Greater Toronto and surrounding areas. The Bank of Canada has been warning home buyers about risks and losses too.
After which all heck has broken lose. By July, in just three months, the average selling price plunged 19% to C$746,218.
“Summer market statistics are often not the best indicators of housing market conditions,” said TREB CEO John DiMichele. The whole industry appears to be stunned.
“We generally see an uptick in sales following Labor Day, as a greater cross-section of would-be buyers and sellers start to consider listing and/or purchasing a home,” he said. “As we move through the fall, we should start to get a better sense of the impacts of the Fair Housing Plan and higher borrowing costs.”
Given the crazy price surge through April, the average price was still up 5% from July last year. And the composite “benchmark” price, which too has plunged since April and declined another 5% since June, is still up 18% year-over-year.
“The market is stalled despite what TREB is saying,” boots-on-the-ground observer in Toronto told me. “Hardly anything is moving. Houses are taken off the market. Some of the desperate ones are placed back on the market at a reduced price.”
“I’ve been speaking with bankers, mortgage brokers, and real estate agents,” he said. “There is a genuine fear that a collapse in prices is at hand if buyers don’t show up in the fall. This is what I heard from them:
- Many Johnny-come-lately speculators bought new homes within the last year which have not been built yet. They were hoping to flip them before moving in. I suspect this will be a drag in 2017 and 2018 as it will add to the supply.
- Mortgage rates for second and third mortgages have jumped by several points. I am told by brokers that rates for second mortgages are in the 6% to 8% range, and that rates for third mortgages exceed 10% (of course, it depends on individual cases).
- HELOCs have been all the rage the last 12 months, mainly used for paying off credit card debts. But now it’s already getting difficult to get HELOCs.
Housing bubbles cannot go on forever, despite what participants may think. Toronto’s house price bubble has been one of the most magnificent in the world, barely even dipping during the Financial Crisis. These sky-high prices create all kinds of problems, from the debt load becoming an albatross around the neck of households to millennials not being able to move out from their parents’ homes.
The risks associated with the debts that this bubble has been funded with have become immense. Now the government and the Bank of Canada are hoping for some sort of slow and orderly wind-down of the bubble that doesn’t cause too much disruption in the overall economy and too much damage among the banks. And that would be a great thing to hope for.
Home Capital Group, Canada’s largest “alternative” mortgage lender, collapsed earlier this year and was subsequently bailed out by Warren Buffett. Now the Canadian finance minister boasts about the until then hidden crony-capitalist aspects of the bailout. But his assumptions might be wrong. Read… “Probably Not a Coincidence that the Prime Minister and I Were in Seattle meeting with Warren Buffett”