CREA releases home sales data; New report highlights speculation in Toronto condo market
MAY 17, 2011
CREA releases resale data for April 2011
It was widely reported by all the big media outlets and it shouldn't come as a surprise to anyone who has read the latest tour through the board stats. CREA (the Canadian Real Estate Association) has released their final April numbers and they are not pretty, though the weakness in sales was far from unexpected.
Some key quotes:
"Actual (not seasonally adjusted) activity was down 14.7 per cent from levels reported last April.
With fewer sales and an increase in newly listed homes, the national housing market moved further into balanced territory in April. The national sales-to-new listings ratio, a measure of market balance, stood at 52.5 per cent in April, down from 55.7 in March."
Of note, a balanced market is generally considered to be between 45% and 60% (or 0.45 and 0.6 as I often report it). A buyer's market where inventory is building substantially faster than sales, and where downward price pressure typically follows, is anywhere below 45% (0.45), while a seller's market is above 60% (0.6).
“Changes to mortgage regulations that took effect in April 2011 likely sidelined a number of first-time homebuyers,” said Klump. “By contrast, higher end home sales in Greater Vancouver and Toronto had their best April ever.”
Not hard to figure out what happens to the average house price when you remove "a number of firt-time homebuyers" and leave a disproportionate number of 'trader-ups'. As noted in the latest tour through the board stats, sales of condos, often an entry level home purchase in many larger cities, fared the worst of all housing types in April, a sign that indeed the buyer pool had been squeezed.
The important numbers to watch over the next few months are the months of inventory, which continues to build. It registered in at six this past month, up from 5.7. This is the amount of time it would take to sell all the current housing inventory using the latest month's sales numbers. It's quite unusual to see 7 months of inventory in Canada. In the past, downward price pressure has mounted as the months of inventory moves past this mark.
In their monthly resales data, CREA always includes the following graph:
When the red line drops below 45 percent on the right vertical axis, watch for price pressure. Similarly, when the blue bars pass 8 months on the left vertical axis, the same is true.
Equally importantly is the sales to new listing ratio (mentioned above). In CREA's monthly resales report, they always releases a graph similar to the one below. Watch for a divergence between the blue and red lines. This implies that inventory is building faster than sales can absorb it. Once the ratio hits below 0.45 and lingers there, the effect of excess inventory begins to weigh on prices.
The next few months will be telling. The key metrics to watch have been outlined above. In addition, we'll keep an eye on sales at the entry level as they give insight into the extent to which the buyer pool has been squeezed (if at all) by the new rule changes.
New report highlights speculation in Toronto condo market
This is certainly not the first time that I've written about the risks to the Toronto condo market and the major speculative froth and overbuilding that appear rampant. Previously it had been suggested that up to 40% of new condos were being purchased by 'investors' (that term is being applied very loosely as most condos in the city of Toronto are cash flow negative once all expenses are considered. I've broken the math down before. This means that buyers are banking on cap gains to make a profit....the definition of speculation).
Interestingly, a new report on the Toronto condo market (hat tip to BD for the link) has been released by Urbanation has pegged that number as significantly higher than originally suspected. For reference, Urbanation is a Toronto research firm that, according to their home page...
"actively tracking Toronto’s highrise condominium market. From projects in the planning stages, to new projects in the sales and construction phases, to completed projects trading in the resale market – Urbanation monitors the market’s performance, continuously collecting data and providing economic and statistical analysis to its clients with consummate accuracy."
The report is the Q1 2011 Toronto CMA Condominium Apartment Overview and contains the following Rental Market and it contains the following tidbits:
Index rents among leased condominium apartments in the Toronto CMA increased by 0.8%
in Q1-2011 from $2.09 psf in the fourth quarter of 2010 to $2.11 psf. Annually index rents
have increased just 2.2% over Q1-2010 ($2.06 psf).
Based on a survey of condominium industry professionals conducted by Urbanation last
year, 45% to 60% of all new condominium apartments in the Toronto Census Metropolitan
Area (CMA) are purchased by investors (buyers that do not intend to occupy their units).
Emphasis mine. If true, this is a shocking number.
As noted before, it's blatantly obvious that demand for Toronto condos is being propelled by unsustainable speculation. It begs the question of what happens to that demand if the expected capital appreciation does not materialize.
An even bigger question is whether or not these 'investors' would hold their cash-sucking investments at the same time that property values dropped, or would they rush to sell and lock in any gains (or losses) and overwhelm the true organic condo demand in a deluge of listings? And if they do rush to sell, they will be competing with all the condo king and his minions who are seeking to cash in on their guaranteed profits from pre-sales. To whom will they all sell?
To appreciate the magnitude of that number, consider that the New York Times ran an article at the peak of the US housing bubble explaining that, "Real estate specialists estimate that speculators and other investors account for as much as 60 percent of condo sales in Florida". We know how that ended for them:
Since 2006, average condo prices have fallen 45 percent, to 2002 levels. Condo sales in 2008 dropped to a level that hadn't been seen in nearly a decade, even though there are thousands more units. Condo construction is at a near standstill.
I understand that Toronto is different.....strong immigration.....lack of building space....etc. So was southern Florida until 2006....as well as a host of other cities where condo speculation ran amok.....until all of a sudden they weren't different anymore. A silent whistle was blown that only dogs and condo speculators can hear. On that day, sales began to die, and inventory began to build. The capital gains that the 'investors' had hoped for were now hopelessly gone. With them went the artificial demand that had supported the market.
Once again, if you are holding a cash flow negative condo in Toronto, consider this current market a gift.
Cheers,
Ben
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- toronto,
- urbanation
4 Comments
One stat that is missing is the dollar value per square foot in the condo market. As an underwriter of mortgage funds I take this value as the most influential in investing. The condo lands at the end of False Creek in Vancouver at the peek where valued at $1000 a square foot. We all know the end of that scenario. In the current Vancouver market we see $500-$550 a square foot. These prices send shivers down an underwriters spine.
Once again people never really do the real math when it comes to property investment, they are caught up in the hype to the potential gains and the pear pressure of cocktail parties and real estate agents hype.
Toronto mid month stats. The sales declines are going to go away from now on as we have lapped mortgage rule changes last year....yet prices keep rising. Why are sellers not selling? The million dollar question. Interesting the condo market still looks soft. Condos will be the first to implode whenever that happens.
http://www.torontorealestateboard.com/consumer_info/market_news/news2011...
I am waiting for the CN tower to turn into condos. That will be the top.
fyi, I would stand in line to buy one
great post. thanks for sharing