Analysis: The cases for soft and hard landings in Toronto prices

Price movements in Toronto residential real estate might follow declines in home sales volume

Analysis: The cases for soft and hard landings in Toronto prices
With the Canadian Real Estate Association’s latest data indicating that housing sales in Toronto suffered a sharp drop last month, an industry observer noted that prices may follow suit in the near future.

In a commentary piece late last week, Bloomberg correspondent and markets analyst Erik Hertzberg noted that Toronto’s home sales volume—which reached its lowest level since 2008—might be an indicator that a “modest” price decline is increasingly likely.

“According to Bloomberg calculations, the 3-month moving average of the sales to new listings ratio explains almost 60 per cent of the variation in Toronto benchmark home prices five months later. A sustained ratio of 40 per cent implies small, single-digit annual price declines in about half a year,” Hertzberg explained.

“Just such a soft landing is the prevailing view of most economists, as well as the Bank of Canada. Home prices in the country’s financial capital after all have been climbing steadily for years, and the recent run of annual gains in excess of 30 per cent was bound to end. Even amid the sales decline in May, Toronto benchmark prices were up 1.2 per cent last month.”

Elaborating on the “soft landing” scenario, Hertzberg pointed at the strong fundamentals in Toronto (and Vancouver, as well) that preclude the probability of a sudden, dramatic drop.

“As the central bank pointed out, about 40 per cent of the 300,000 immigrants who settled in Canada last year moved to Ontario. That bolsters demand. And land-use regulations are often cited as a constraint that will prevent excessive supply from coming on the market,” Hertzberg stated. “Vancouver’s recent experience is easing some concern that the market is vulnerable. The imposition of a tax on foreign buyers in the Pacific Coast city last summer spurred declines in sales and prices, but the latest data indicate those are rebounding.”

On the other hand, a “hard landing” will primarily depend on “whether the sales to listings ratio continues falling.”

“Market psychology is key. There’s been plenty of speculative demand in the market, and any fear of a correction could send investors running for the exits. And a wave of new construction is about to hit the market. Data this month from Canada Mortgage and Housing Corp. showed year-to-date single family completions in Toronto rose to 4,937 units in May — the most since 2008 and up 19 per cent from 2016.”

“Even the conventional model suggests that in the event the sales to listings ratio starts hovering at about 30 per cent, price declines could start hitting double digits,” the analyst concluded.

Related stories:
Homes sales decline ‘sharply’ in May
Highlights from CREA’s latest stats