Predictions For The Fall Market

Shall we start this blog post like the last one?

Another story from my personal life that has nothing to do with real estate?

Well, I was mowing the lawn the other day, and this chipmunk came up to me and started asking about interest rates.  Er, well, let’s skip the story this time…

Having regaled you with an unnecessarily-long post on Tuesday about external factors that will affect the 2019 fall real estate market, I figured today I would give you my two cents.

Now, since my predictions are likely going to be bullish in nature, I figured I would get out ahead of the biggest bearish counter-argument: “You’re in sales.  What else are you going to say?”

My wife and I purchased a house in 2018.

There.  I said it.  For the first time on this blog.

I haven’t exactly made this a secret, since I refer to it quite a bit in my Pick5 videos, and all my clients know.  But for the open book that I am, it’s fair to assume that, at the very least, I would have said something by now, and at most, I’d have documented the process in an epic 5-part blog series.

Believe it or not, an epic series is still in the works.  I just haven’t found the time, and I’ve been planning this since the spring.

I love sharing my personal adventures in real estate for all to read, and this story will be exactly that.  I promise.

In the meantime, realize that I tell you this now because I want to counteract the argument I’ve grown most tired of over the last few years, which is that my bullishness is merely a necessity, given my occupation.

Now you realize, that couldn’t be further from the truth.

As I tell my clients – I wouldn’t have bought my “forever home” if I thought the market was going down.  I wouldn’t have chosen now, or in this case, a year ago, to take the plunge, make the jump, and slap on the golden handcuffs, if I thought I’d do better by waiting, or if I had any concerns about the future of Toronto real estate.

So if you doubt my bullish nature, and the sincerity of the following predictions, just know that I’m in the same boat as every home-owner, and every would-be home buyer.

Now where should we start?

Perhaps with the prediction that will get the most attention, if it comes to fruition…

1) Average home price will rise.

This is an easy prediction to make, right?

Well first of all, are we talking month-over-month, or are we talking year-over-year?

For my prediction, I’m taking about both, and while the former should be obvious, on account of the seasonal dip in August, I do believe that most people should see the latter coming as well.

So first, let’s look at the average home price, month-over-month, throughout the last eight years.

This will help us predict where prices are going from August to September, and if you’re a buyer in this fall market, you’ll want to know where the peaks and valleys lay within.

I’ve had to put the data on two lines here, so it looks odd but you’ll get the point:

You’ll want to look this data over on your own terms, but here’s what I see:

1) Prices rose (obviously…) from August to September in 8/8 years.

2) Prices rose from September to October in 6/8 years, with one of those years – 2012, being a decline of 4/100th’s of a percent.

3) Prices declined from October to November in 5/8 years.

4) The average increase in price from August to September is 5.875%

5) The average increase in price from September to October is 0.32%.  This is largely due to a huge decline of 4.6% in 2011, followed by modest increases from 2013 onwards of only 1.3%, 2.4%, 0.4%, 1.0%, 0.8%, and 1.3%.

6) The November average home price was lower than September in 4/8 months, and higher than September in the other 4/8 months.

No let’s look at the numbers, year-over-year:

So in a combined 20/21 months, the average home price, year-over-year, has increased.

This is the story of our Toronto real estate market, and that one bit of red ink you see on the right-hand side relates to the crazy 2017 market.  Having come off a peak of over $920,000 in April, prices were slow to recover throughout the summer and into the fall.  Notice that the $774,489 price in September 2017 still wouldn’t have topped the November price in 2016.  Shocking!

The price growth through the last two years has been modest.  Ignoring November of 2017 as the outlier, we’re seeing between 2.3% and 3.5% in year-over-year growth.

So let’s assume that in 2019, we see the same levels of growth.

This would give us upcoming fall prices of:

September: $819,893
October: $835,597
November: $815,937

Now keep in mind that “peak” prices in 2019 so far have been as follows:

April: $820,148
May: $838,540
June: $832,703

So the bigger question is: will the fall surpass the spring?

October trumped May in 2014, 2016, and 2018, but not in 2015 or 2017.

My prediction is that it will, and the Toronto average homoe price will pass $840,000.

2) Inventory will be high.

We talked about inventory in Tuesday’s blog, referring to this as one of the factors affecting the fall market, and while the world economy and Canadian election will have major ramifications on our lives, indirectly, and over the medium term, inventory will play the largest role in what happens to the market this fall.

I have absolutely nothing to base this prediction on, unfortunately.

It’s simply my gut feeling.

In C01/C08 on Tuesday, there were 81 new listings.

I always use C01/C08 as the measure of the market, for one, because this number is the highest of areas I chart (ie. E01/E02/E03, C9/C10/C11, etc), and thus it has the lowest volatility, but also because downtown is where the most action should happen.

As I’ve written before in this space many times, we’re accustomed to seeing 100+ listings on the busier listing days (Tues/Wed/Thurs) when the market is in peak season, and often 120+ when the market is insane.

So 81 new listings for the Tuesday after Labour Day?  That’s telling me something.

And we’re seeing listings across an array of price points and property types.  On Tuesday, I saw more quality listings (ie. ones I emailed to clients) than I did in the last two weeks of summer combined!

Going back to the data shown on Tuesday, we can get a sense of how the fall market plays out, and where we expect inventory to be:

How would you choose to analyze this data?

Well, if you’re a buyer, you want to know what different months are like in the market in terms of inventory.

Take last year, for example.  We saw 15,920 new listings in September, and that figure dropped by 9.4% in October before levelling out by a modest 1.2% in November.

So if you’re a buyer, you’ll note that October isn’t really a “worse” month for inventory than September, and it’s not like November is barren.

However, and this was perhaps misleading, but however nonetheless – if you look at the eight-year trend, you’ll see listings drop an average of 13.0% from September to October, and then a whopping 23.5% from October to November.

Do we expect 2019 to follow closer to 2018?  Or should we believe that the trend will ultimately prevail?

Personally, I think that September is going to give us a massive influx of listings, and those buyers who slow-play the market and wait until October will have a lot less to choose from.

In terms of actual inventory levels, the delta over eight years isn’t huge.  In September, for example, we see a low of 14,629, a high of 16,433, and an average of 15,480.  Whether we see 15,500 or 16,000 new listings won’t have an effect on price.  Supply still lags behind demand, as it has in virtually all market segments for the better part of two decades.  But my gut tells me we’ll see higher inventory levels this fall, and I still think prices will increase.

3) The market will get “tighter” as the fall moves on.

This is a term I use quite often – a “tight” market.

Tight.  Firm, tense, hard to move.

In the context of a real estate market, it’s about the shrinking gap between sales and listings, thus that place in which you find yourself in the market becomes tighter.

This is one of those predictions where I’m going to look for data to back up my theory, and this time, it honestly wasn’t hard to find.  In fact, I’d probably have been better of leaving these stats out, and then playing dumb.  The dumb genius.

As I alluded to above, the amount of new listings, historically, drops from September to October, and then October to November.

But what do you think about sales?

Would you expect to see more sales in September or October?  Think about it for just a moment.

September gives us more inventory, and more hot-to-trot buyers.  Should we expect to see more sales in September?

I’d have thought so, to be honest.  And I’d have been wrong.

Sales actually increased in October, over September over the past eight years.

How many of those eight years?

All of them.

8/8, as you’ll see below:

And as a result, you will also undoubtedly notice that the “Sales-to-New-Listings” ratio increased, on average, from 48.1% to 59.5%, September to October.

And although sales decline from October to November in 7/8 years above, it seems as though new listings declines at a higher rate.  And thus the SNLR ratio increases to 68.2%.

So when I say that “I expect the market to get tighter as the fall moves on,” now you can see that the stats back up my theory, at least, historically.

4) Condo prices will defy logic, and keep rising.

Here’s a story that will make you sick…

Clients of mine purchased a condo in July of 2011 for $333,000.  They renovated the condo for $15,000, which to be quite honest just can’t be correct.  I mean, when I ask my wife how much she spent on something, I’m pretty sure she tells me it was less than it actually was.  In this case, they did everything themselves, including removing the “popcorn” ceiling, and sourcing every single feature and finish from the good ole, “back of the truck,” and the reno felt like it should have cost triple.

In November of 2015, they purchased a house outside the city and sold the condo.  Listed for $399,900, they got the full list price.

This was one of those rare times where I represented both buyer and seller, as I had a client interested in this building.  This was a completely different market climate, with no “offer dates” and over-asking premiums, trust me when I say that the $399,900 list price was fair.

Having paid real estate fees to sell the condo, land transfer tax to buy the condo, and legal fees on both, these guys were walking away with a little more than $25,000.

The current owners of this condo have also purchased a house, and they too will be selling the condo next month.

This time, however, the price is expected to be a smidge higher, and they might have a little more walking-around money.

How much higher?

Well, I think our floor for this unit is $600,000, and they could very well see $640,000.

So again, taking acquisition and disposition costs into the equation, these guys will still profit upwards of $200,000.

So the first people owned the condo for 4 years and 4 months, and made $25,000.

The second people owned the condo for 3 years and 11 months, and stand to make $200,000.

And the first people were the ones who put in the work!

My point is that the run-up in condo prices that we’ve seen in the last decade is most pronounced in the last three to four years.  And this is while the market for freeholds has been spotty by comparison.

Let’s plot the average price of a 416 freehold detached house versus that of a 416 condominium, every month since the start of 2014:

What jumps out at you first?

Is it the level of volatility with respect to detached?

Or is it the difference between how both property types responded to the spring of 2017?

To be fair, keep in mind that the average price of detached will always fluctuate through the different seasons.  We simply do not expect the average price of a detached home in April or May to keep pace in July or August.  It’s never happened and it’s never going to.  Condos, on the other hand, are a far less volatile animal, and this is likely due to the fact that freehold home sales trace the school and family calendars.

Now let’s plot average home price versus condos, and this time we’ll use both the GTA average as well as the 416:

Interesting to note that the 416 looks more volatile than the GTA, but that’s a topic for another day.

Once again, however, we see that the rise in condo prices has been very gradual, and there are far fewer peaks and valleys than with any other market segment.

Now for the rub: how do you think condos have appreciated versus the market average?  Or versus freehold segments?

Let’s choose 2014 as our starting point, and keep in mind that we’re comparing to July of 2019, since the August data isn’t out yet (should be tomorrow).

January 2014 to July 2019:

GTA: +53.2%
416: +52.1%
416 Detached: 38.2%
416 Condo: +71.6%

Did you see this coming?  I don’t mean did you see it coming – as of January, 2014, because nobody did.  Except maybe Barry Fenton.

The appreciation in condos versus freehold detached is almost double.

And 416 condos out-appreciated the GTA sales average by 18.4% in absolute terms, which is 34.6% on a relative basis.

Let’s try something else…

January 2016 to July 2019:

GTA: +27.8%
416: +31.9%
416 Detached: 15.6%
416 Condo: +50.9%

Tell me you even knew about this before today, go on.

Appreciation on 416 condos has tripled that of detached in the last 2 1/2 years, and is 83% higher than the rate of return on the GTA overall.

So despite all of this, why am I saying that condos are going to continue to rise?

Because it’s about relative prices now, not absolute.

Before Labour Day, a colleague of mine was offering on a small unit in King West at 39 Brant Street.  The unit was a mere 389 square feet.

Ten years ago, that unit would have been 589 square feet.  Of course, it would have cost about $350,000, but I digress.

This 389 square foot unit was listed at $424,900 and received thirteen offers.

The unit promptly sold for $481,000.

To the buyer, he or she thinks, “I got a condo downtown for $481,000, which is a price point you n-e-v-e-r see!  I got in!  I did!”

That’s true.  I’m selling small 1-bed, 1-bath units in Liberty Village to investors for $525,000, so a condo in King West at that price point is unheard of.

But do you know what else is unheard of?  $1,237 per square foot for a bachelor with no parking, no locker, and no outdoor space.  Not even a Juliette balcony from which to spit about the high price of real estate.

Buyers care less and less about the relative price of real estate downtown, so long as they can afford the absolute price.  And developers are all too happy to play along, with units shrinking in size with every successive project.

Condos are going up in price this fall, you heard it here first.

Well folks, that’s it for today.

Only four predictions, but as I just turned 39-years-old, and somebody told me “40 is the new 50,” I’d like to think that four predictions is the new five.

I was also told by a new member on my team – an early millennial, “God, you talk about when you were younger a lot.”

I’m sure another child will only cushion the blow, right?

Happy fall, folks!

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