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Move Smartly Toronto Area Real Estate Market Report: November 2022 – Move Smartly

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Last month, I discussed on Twitter how the sentiment in Toronto’s housing market today is not nearly as pessimistic as it was in the spring, a comment which of course was not well received by housing bears (those that hold negative outlooks on the market’s prospects going forward). 

But market sentiment is often misunderstood, with some assuming that low sales volumes alone tells the entire story and others that the sentiment they see reflected in equity and bond markets automatically extends to the residential housing market — which is not necessarily the case.

Shifts in market sentiment are critically important to understand because they are often the key driver behind the big shifts in home prices during booms and busts. But the challenge with tracking changes in market sentiment is that there are no great real time measures of real estate consumer sentiment. 

Given this, I’m going to walk through some of the big shifts in buyer sentiment since the start of COVID pandemic period in March 2022 while discussing some of the measures we might look at to measure these changes in sentiment. I’ll then end with looking at some of the latest shifts in sentiment I’m currently seeing in Toronto’s housing market.  

For this overview, I’m going to primarily focus on two metrics — the MOI, or months of inventory, which is the number of active listings in a month divided by the number of sales for the same period, and the average price.  

The MOI is an important metric because it captures both demand (via the number of sales) and supply (via active listings) in one metric which gives us insight into how competitive the market is at any given moment. But what’s often more important than the actual level of the months of inventory at any given moment is the rate at which it is changing over time.  

As the months of inventory declines, the market becomes more competitive as inventory tightens, putting upward pressure on prices. When MOI increases, it reduces price growth and may even lead to a decline. When the MOI remains relatively unchanged from one month to the next, this is usually a sign of some balance in the housing market. But balance doesn’t necessarily mean flat or rising prices, it just indicates the consistent speed or ‘cruise control’ — whether the market isn’t heating up or cooling down.

Toronto’s housing market was relatively calm and balanced in 2018 for two reasons. Firstly, Toronto’s housing market experienced a dramatic housing bubble in the suburbs that saw home prices surging by over 30% per year during the first quarter of 2017 only to see home prices fall sharply in the second half of 2017. While Torontonians were adjusting to this rapid decline in prices, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), introduced a mortgage “stress test” on all uninsured mortgages that took effect on January 1, 2018. The stress test, which requires borrowers to quality at a rate that is at least 2% higher than what they would actually pay on their mortgage, made it harder for home buyers to qualify for a mortgage, which pushed some home buyers to the sidelines. 

By 2019, the worries and distress of the 2017 Toronto suburban housing crash were a distant memory and home buyers and investors had adjusted to the mortgage stress test, the housing market started to heat up again. We can see the housing market heating up by the rapid decline in the MOI in 2019, which fell from 3 at the beginning of the year to 1.5 by the end of the year. 

This entire year was a build up to what likely would have been a very exuberant housing market in early 2020 had there not been a global pandemic. By February 2020, home prices were up 17% over the previous year and all signs at the time were that things were going to get more competitive. 

MarketSentiment

In March 2020, the first COVID lockdowns happened and a market that was on the verge of exuberance suddenly tipped over to fear. As buyers stayed home and hit pause on their home buying search, inventory levels surged; prices began to fall because some sellers needed to sell (due to the purchase of another home or other life changes), and as there were very few buyers in the market, these sellers felt pressured to take whatever offer they got. 

By the spring of 2020, buyers started to jump back into the market, though buyers of low-rise homes were still very cautious — Ontario was still largely under a lockdown and there was still a lot of economic uncertainty. 

The sentiment in the condo market was far more pessimistic. Renters were leaving the city as pandemic restrictions shut down work places, vacancy rates were on the rise, and rent prices were falling as some existing tenants were negotiating rent reductions and others were refusing to pay rent due to unemployment (aided by the province introducing an eviction ban on tenants during the lockdown period). 

This led to a significant surge in the number of condominiums listed for sale by the summer of 2020 as many investors were looking to cash out of their investments. 

But as we moved towards the fall, the market sentiment slowly started to shift and by November the market had turned on a dime from pessimistic to optimistic and eventually exuberant. We saw this on the ground as more buyers wanted to re-enter the market after hitting pause and new buyers jumped in eager to capitalize on ultra low interest rates. 

With condo prices falling in the summer and early fall months of 2020, investors saw this as a buying opportunity and suddenly rushed back into the market during the last two months of 2020.

We can see this rapid shift in sentiment in the chart above by looking at the dramatic decline in the MOI from November 2020 to March 2021 and the corresponding surge in home prices which went from $961,738 in November 2020 to $1,107,537 in March 2021, a 15% increase in just four months. Note that the slight dip in average prices in December 2020 was due to a much higher share of condos selling that month which pulled the average down since condominiums have a lower average price when compared to low-rise homes. 

When we think about the demand for homes in any given month, analysts often measure that by looking at the number of homes that sold. Sales may be an accurate measure of demand in markets where homes sit on the market for a long period of time and rarely sell with multiple buyers competing for the same home. But in Toronto where homes sell quickly and often with more than one buyer making an offer, the number of buyers making offers but not getting the home is an additional measure of demand for homes that is difficult to measure, which is why I often refer to it as the shadow demand for homes. 

During that period of exuberance, the end of 2020 and the first quarter of 2021, homes were receiving significantly more offers on their offer nights than they were just months earlier. This number of people competing for homes is not only an indicator of the true demand in the market, but it also has the effect of influencing home buyer behaviour. 

Home buyers begin to panic and feel more anxious when every time they make an offer on a home they find themselves competing with 20 other buyers. This panic and anxiety often leads them to offer a little bit more on the next home they are bidding on just so they can finally win on offer night. We don’t see this type of panic and anxiety when homes are receiving two or three offers on their offer night, with buyers feeling that it’s likely  just a matter of time before a seller accepts their offer. This is why the high level of shadow demand, thousands of buyers making offers and losing on any given night, helped fuel the rapid surge in prices in that short period of time. 

And then, all of a sudden, during the 2nd and 3rd quarters of 2021 the market calmed down.

Even though we saw just a modest increase in inventory, there were suddenly far fewer buyers in the market. Fewer homes were receiving multiple offers while some homes were sitting on the market for weeks. We had clients making offers on homes with conditions on financing and home inspection during this period, something that wouldn’t have been possible during the frenzy we saw during the first quarter of 2021. 

The sentiment from buyers had turned from FOMO (fear of missing out) to patience and a bit of greed since they saw some homes selling for a bit less than they would have expected. We can also see this in the fact that prices saw very little movement on a month over month basis during that period. 

Why the sudden shift in sentiment? It’s difficult to say, but in the case of the condo market, a lot of the deals investors were likely getting because of high levels of inventory had disappeared and the overall rapid increase in prices may also have pushed some buyers to the sidelines. 

And then just as suddenly, the sentiment in the market shifted again as we moved towards the fourth quarter of 2021. Buyers started to rush back into the market, and the MOI declined from an already low of 1MOI to just a half a month of inventory. During the fourth quarter the momentum and the exuberance in the market were building and by the first quarter of 2022 average prices had accelerated by 15%, or over $150,000, in just two months eventually peaking at $1,338,611 in February 2022. 

It was not uncommon during the first two months of 2022 to see homes that had 40 to 60 buyers all making an offer on the same home and the eventual sale price being 5 to 10% more than what comparable sales at that time could justify. This was irrational exuberance and the fear of missing out (FOMO) was in the air.  

And then of course the sentiment in the market turned yet again, from FOMO to fear (for remaining sellers) and greed (for remaining buyers). The combination of high home prices, buyer fatigue and news of rate hikes in the future pushed many buyers to the sidelines.

Sellers who had already bought a home were getting fewer showings and offers than they had expected, and in some cases, no offers on their scheduled offer night. Caught between two transactions (because they had already bought a home), many of these sellers agreed to sell for tens of thousands less than what a similar home sold for just a week earlier. By July, the average price for a home in the Greater Toronto Area had declined from $1,338,611 in February to $1,079,432 in July, down by just over $250,000 or 19% in just five months. 

Since July, inventory levels have declined and prices have plateaued which has once again led to a shift in market sentiment. Sellers are far more patient today and not as fearful because most of those remaining in the market have not already committed to buying another home and are not under pressure to sell their current home as soon as possible. 

In my September report, I showed that an increasing number of sellers are simply taking their homes off the market if they can’t achieve the price they want and, in some cases, renting their property out instead. Many are optimistic that Canada’s increasing immigration targets coupled with a decline in new home sales will eventually lead to upward pressure on home prices again. 

Buyer sentiment has also shifted considerably since the spring market. The buyers I hear from still recognize that there is a high likelihood that prices will fall further in 2022, but, like many sellers, they see this as a short-term cyclical trend rather than a long-term decline. Many of them just need a home to buy and are finding it increasingly difficult with so few homes currently available for sale. 

But hopefully one takeaway from this section is that the sentiment among buyers and sellers in the housing market is very fickle and can turn on a dime at any moment.  

And if we think about how the market sentiment might change in 2023, I think the odds are that things will turn a bit more pessimistic as households adjust to today’s higher interest rates and possibly layoffs as businesses adjust to our slowing economy. If we do in fact see a ‘white-collar recession’ some households with a heavy debt load may have to deal with a shock in their surging debt payments and a loss in income — and the mood may shift once again.

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Former B.C. Realtor has licence cancelled, $130K in penalties for role in mortgage fraud

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The provincial regulator responsible for policing B.C.’s real estate industry has ordered a former Realtor to pay $130,000 and cancelled her licence after determining that she committed a variety of professional misconduct.

Rashin Rohani surrendered her licence in December 2023, but the BC Financial Services Authority’s chief hearing officer Andrew Pendray determined that it should nevertheless be cancelled as a signal to other licensees that “repetitive participation in deceptive schemes” will result in “significant” punishment.

He also ordered her to pay a $40,000 administrative penalty and $90,000 in enforcement expenses. Pendray explained his rationale for the penalties in a sanctions decision issued on May 17. The decision was published on the BCFSA website Wednesday.

Rohani’s misconduct occurred over a period of several years, and came in two distinct flavours, according to the decision.

Pendray found she had submitted mortgage applications for five different properties that she either owned or was purchasing, providing falsified income information on each one.

Each of these applications was submitted using a person referred to in the decision as “Individual 1” as a mortgage broker. Individual 1 was not a registered mortgage broker and – by the later applications – Rohani either knew or ought to have known this was the case, according to the decision.

All of that constituted “conduct unbecoming” under B.C.’s Real Estate Services Act, Pendray concluded.

Separately, Rohani also referred six clients to Individual 1 when she knew or ought to have known he wasn’t a registered mortgage broker, and she received or anticipated receiving a referral fee from Individual 1 for doing so, according to the decision. Rohani did not disclose this financial interest in the referrals to her clients.

Pendray found all of that to constitute professional misconduct under the act.

‘Deceptive’ scheme

The penalties the chief hearing officer chose to impose for this behaviour were less severe than those sought by the BCFSA in the case, but more significant than those Rohani argued she should face.

Rohani submitted that the appropriate penalty for her conduct would be a six-month licence suspension or a $15,000 discipline penalty, plus $20,000 in enforcement expenses.

For its part, the BCFSA asked Pendray to cancel Rohani’s licence and impose a $100,000 discipline penalty plus more than $116,000 in enforcement expenses.

Pendray’s ultimate decision to cancel the licence and impose penalties and expenses totalling $130,000 reflected his assessment of the severity of Rohani’s misconduct.

Unlike other cases referenced by the parties in their submissions, Rohani’s misconduct was not limited to a single transaction involving falsified documents or a series of such transactions during a brief period of time, according to the decision.

“Rather, in this case Ms. Rohani repetitively, over the course of a number of years, elected to personally participate in a deceptive mortgage application scheme for her own benefit, and subsequently, arranged for her clients to participate in the same deceptive mortgage application scheme,” the decision reads.

Pendray further noted that, although Rohani had been licensed for “a significant period of time,” she had only completed a small handful of transactions, according to records from her brokerage.

There were just six transactions on which her brokerage recorded earnings for her between December 2015 and February 2020, according to the decision. Of those six, four were transactions that were found to have involved misconduct or conduct unbecoming.

“In sum, Ms. Rohani’s minimal participation in the real estate industry as a licensee has, for the majority of that minimal participation, involved her engaging in conduct unbecoming involving deceptive practices and professional misconduct,” the decision reads.

According to the decision, Rohani must pay the $40,000 discipline penalty within 90 days of the date it was issued.

 

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Should you wait to buy or sell your home?

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The Bank of Canada is expected to announce its key interest rate decision in less than two weeks. Last month, the bank lowered its key interest rate to 4.7 per cent, marking its first rate cut since March 2020.

CTV Morning Live asked Jason Pilon, broker of Record Pilon Group, whether now is the right time to buy or sell your home.

When it comes to the next interest rate announcement, Pilon says the bank might either lower it further, or just keep it as is.

“The best case scenario we’re seeing is obviously a quarter point. I think more just because of the job numbers that just came out, I think more people are just leading on the fact that they probably just gonna do it in September,” he said. “Either way, what we saw in June, didn’t make a big difference.”

Here are the pros of buying/ selling now:

Pilon suggests locking in the rate right now, if you don’t want to take a risk with interest rates going up in the future.

He says the environment is more predictable right now, noting that the home values are transparent, which is one of the benefits for home sellers.

“Do you want to risk looking at what that looks like down the road? Or do you want to have the comfort in knowing what your house is worth right now?” Pilon said.

And when it comes to buyers, he notes, the competition is not so fierce right now, noting that there are options to choose from.

“You’re in the driver seat right now,” he said while noting the benefits for buyers.

Here are the cons of buying/ selling now:

He says one of the cons would be locking in the rate right now, then seeing a rate cut in the future.

The competition could potentially become fierce, if the bank decides to cut the rate further more, he explained.

He notes that if that happens, the housing crisis will become even worse, as Canada is still dealing with low housing inventory.

An increase in competition would increase the prices of houses, he adds.

Selling or buying too quickly isn’t the best practice, he notes, suggesting that you should take your time and put some thought into it.

Despite all the pros and cons, Pilon says, real estate remains a good investment.

According to the latest Royal LePage House Price Survey for the second quarter of this year, the average home price in Canada is $824,300. That’s up 1.9 per cent from the same time last year, and up 1.5 per cent from the first quarter of 2024.

In the Ottawa Housing Market Report for June 2024, the average price of a home was up 2.4 per cent from this time last year to $686,535, but down 0.6 per cent from May 2024.

Experts believe many potential buyers are still hesitant of jumping into the housing market and waiting for another interest rate cut of 50 to 100 basis points.

“I don’t think it’s going to be the rush that we see in the past, because people are used to more of a conservative approach right now,” said Curtis Fillier, president of the Ottawa Real Estate Board. “I think there’s still a bit of a hold back, but I definitely do think with another rate cut, we’ll probably see a very positive fall market.”

With files from CTV News Ottawa’s Kimberly Fowler

 

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Real estate stocks soar to best day of year on rate cut bets

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(Bloomberg) — The stock market’s worst group notched its best day of the year as a cooler-than-expected inflation report stoked bets that the Federal Reserve will start cutting interest rates in September.

Shares of real estate companies jumped 2.7% Thursday for their biggest gain of 2024, climbing to their highest level since March as investors snapped up homebuilder, digital and commercial real estate stocks alike. Real estate also was the best-performing group in the S&P 500 Index Thursday, with volume that was around 30% higher than the 30-day average, according to data compiled by Bloomberg.

Arguably the most significant news to come from the latest consumer price index reading was a pullback in housing-related inflation. Shelter costs rose just 0.2% for the slowest monthly increase in three years. Homebuilders, which have risen 7.1% this year, were up 7.3% for the session, the most since 2022. Shares of D.R. Horton Inc., which is scheduled to report earnings next Thursday, gained 7.3%.

“Housing has really been the last shoe to drop in terms of winning the battle against high inflation,” Preston Caldwell, chief U.S. economist at Morningstar wrote in a note to clients Thursday. “Leading-edge data has strongly indicated for some time now that a fall in housing inflation was in the works.”

A rally in real estate stocks is bad news for short sellers who have been piling into the group, which is the worst performer in the S&P 500 this year. To start the week, short interest as a percentage of float hovered near 49% in the SPDR Homebuilders ETF, the highest level since February for the exchange-traded fund, according to data from S3 Partners.

Property owners are rallying as well. Real estate investment trusts, which were brutally penalized during the two-year run up in borrowing costs, advanced by as much as 3%. And the outlook for the group appears to have turned a corner, according Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers Capital Management.

“We think this is a compelling backdrop for listed REITs especially as fundamental growth remains on solid footing,” he said, referencing the latest inflation data and rate outlook. “The rally that started in October of 2023 pushing returns more than 20% above their trough looks set to continue if inflation cools and interest rates continue to decline.”

Shares of industrial REIT Prologis Inc., which reports second-quarter results on Wednesday, rose 3.3% to hit their highest level since April. U.S. Treasury yields tumbled, with the 10-year bond falling to 4.2% and the policy-sensitive two-year note slipping to 4.5%.

(Updates indexes and stock prices for market close.)

 

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