WHY ARE WE NOT SURPRISED THAT THE REAL ESTATE MARKET IS SLOWING?

August 8th, 2010

CONDO SALES IS A TWELVE MONTH A YEAR BUSINESS

All I keep reading about is letting the public onto MLS and now there are new brokerage companies being formed and some lawyers that will let you list for free or just pennies. While some consumers may think this is Shangri la, there is a real downside for the whole economy!

Currently realtors are responsible and liable for the integrity of the data. Who will be responsible and who will take the time going forward? What do lenders – banks and all financial institutions rely on for making mortgage loans? Where do appraisers get their data for valuations, and for even things like divorces (that could affect up to 40% of us) where the matrimonial home is involved? Think about your line of credit – it is always secured and usually against real estate. Without accurate data no one including CMHC (our Government insurer) would be able to grant high ratio loans.

At the end of the day this country needs this information just to function. Someone has to do it. And someone has to pay for it. In the end it will be the consumer – either through more taxes with the Government adding another Land Transfer tax – the first two just go to General Revenues or we can leave Realtors to pay millions of dollars for the MLS system and maintain data integrity which is recovered through commissions. It seems obvious to me but I’m just a Realtor.

This market is a hard one to read. What we do know is that there are a lot of listings on the Toronto Real Estate Board and the biggest surplus sits in the downtown condo market! We also know that there are a lot of buyers sitting on the sidelines – waiting for the good deals to appear. Who will blink first?

Will sellers, who have already made good returns from a run up in prices over the past few years, sell into a falling market (our best guess is that prices will come off about 5% from the peak reached in early April of this year? Will buyers hold out for even lower prices? Some economists think a 20% drop is possible.

One thing I do know is that a quarter point increase in the Bank Rate is not going to have any effect. With a continuing weak U.S. economy and the European financial crisis, it seems that any significant interest rate increases will be put off to 2011 at the earliest. What does seem to catch investor eyes is the poor stock market performance. Buying real estate is a much better and less volatile option for many investors.

The coming HST has upset most people in Ontario. However it does not impact the resale market and when the smoke clears, I am sure that most developers will bury it in new residential sales. My view is that this will be less of an issue than first feared.

My best guess is that the real estate market will remain fairly active, but of course at lower sales volumes than the first five months of this year. What do you think? Are there any further market surprises yet to be factored into this market?

SALES COMMENTARY:

Our last Report focused on how Government has done its best to slow down the real estate market, even though the real estate industry in total was responsible for about 50% of the economic recovery from the recession of late 2008 into 2009. In this report we will return to analyzing statistics and trying to make sense of where the market is headed. In April sales on the Toronto Real Estate Board reached 10,898 units which was an April record and the third biggest month all time.  However clouds are starting to appear. TREB also recorded 20,683 new listings in April. When you look at early returns for May, sales will be lower than in April and will be about the same as in 2009 – best guess 9,700 units. At the same time, new listings are continuing to accelerate.  Our last Report predicted that the market would peak in late April and it looks like we were right, in terms of sales activity. Prices are a different story. Prices tend to lag sales volumes and we are now seeing prices levelling off. Our best guess is that sales will begin to soften by the fall. Not the 20% that doomsayers predict but more like 2-5%. At the same time, we are already having a sizable number of buyers and investors who are looking to move into the market this fall. Should be interesting times.

On TREB, detached housing now makes up less than 50% of all residential sales (ten years ago it was 65%)! Not surprisingly condo sales are running ahead of the overall market. Downtown condo sales were 37% higher than a year ago in April and the sale-to-list ratio ended the month at 42%. On the Etobicoke waterfront, sales were up by 24% and the sale-to-list ratio settled at 35%. (Remember we were once at 80% and balance is a sale-to-list ratio of 25-35%.) A final observation is that the $300,000 to $400,000 condo market which was the hottest segment has cooled. The primary reason is the increase in mortgage rates and the raised qualification rates impacting younger buyers. The strongest segment of the condo market is over $500,000 – and in the newer buildings!

In this Report, we looked at sales at 50 Lynn Williams in Liberty Village. This is a newer building with just a three year sales history. All three units we examined were sold in March of this year. Two of them were in multiple offers. The first, a small penthouse with one bedroom, locker, and balcony but with no parking sold for $290,000. Two years earlier it sold for $255,000 or an increase of 14%. The second unit is slightly larger – still a one bedroom but with parking. It sold for $314,000. The same unit sold in 2007 for $198,000 which represents a 72% increase. The largest one-bedroom unit, with 2 washrooms, and at just under 700 sf with parking sold for $340,000. It sold 2 ½ years earlier for $281,000 – a 21% increase. Prices in this building are about $550 per sf which seems a little high for the overall market but this is Liberty Village.

RENTAL COMMENTARY:

Rental activity Downtown picked up in April with 23 studios, 260 one-bedrooms, 136 two-bedrooms, and 6 three-bedroom units being leased – a 50+% increase from the start of the year. The rental market is strongest beginning in May and running through September. The most popular rental unit is now the one-bedroom + den and parking which rents for $1650 per month. The basic one-bedroom without parking averages $1350 which is lower than earlier this year. The two-bedroom market was also a little softer with rates ranging from a low of $1900 to $2300 on average with den and parking. Three-bedroom units average $5000 this month due to a couple of high end rentals. Rental supply has increased significantly of late and we would expect to see some downward pressure on rents – particularly in older buildings with units that need to be renovated.