How affordable is a Toronto home?

The long term picture

In the chart above, lower is better! The Affordability Index measures how much of an average income is needed to pay for an average Toronto home. Something in the 30s is good… Back in 1989, the index spiked to above 50%. The connection is clear: when people can’t afford to buy homes, homes stop selling.

Since 1996, the Toronto resale home market has been mostly positive and steady (with the one memorable hiccup in 2008). Year-to-year price increases have varied, but the pattern has been consistent. The average price increase over the past 15 years is just under 6% annually. That’s for the entire GTA, and most central neighbourhoods have gone up a bit more over the same time period.

The key takeaway from this chart? For almost 20 years, the Affordability Index has moved in a narrow band… As long as people have jobs, and interest rates don’t stray wildly from inflation, homes tend to stay affordable.

GTA Market Report – April 19, 2011

Price surge in early April

Toronto home resale prices showed a strong increase in the first half of April 2011. The average sale price of $483,165 was 12% higher than in the comparable period of 2010.

Our chart shows that the increases in 2011 are even more aggressive than those in early 2009. That was a year of post-recession recovery, and sale prices then rose faster than in any other year in the past two decades. In a typical year, average prices increase from January to June in a more gradual pattern, shown by the dotted line in the chart above.

 Jason Mercer, TREB’s Senior Manager of Market Analysis, offered an explanation for the current price increases: “The number of homes listed for sale so far in 2011 has been below expectations. Market conditions have tightened, resulting in increased competition between home buyers and accelerating rates of average price growth,” he said. “The strong rate of price growth reported for the first two weeks of April should entice more households to list their homes for sale. This would result in more balanced market conditions and more moderate rates of price growth,” Mercer continued.

Mortgage rates still attractive

Recent changes to mortgage qualification rules have affected only a small percentage of borrowers. The Bank of Canada will reconsider its position on rates in July.  At that time, the Bank will have to weigh its concerns about core inflation against the continuing high value of the Canadian dollar and its effect on Canadian exports.

Busiest weeks just starting

Sales volume up 50% in last two weeks

Figures released today by the Toronto Real Estate Board show that the number of homes sold this week was up almost  50%, compared to the volume two weeks earlier. For the week ending March 10th, 2,159 homes were sold; in the week ending February 24th, the number sold was 1,460.

It seems that every year, buyers are out in force in the first three months. Then, after March break, more sellers list their homes. The second quarter (April to June) is usually the time when the largest number of homes are sold.

When do home prices increase?

Some years, it’s the first two months that see the greatest increase in sale prices. This is when buyers outnumber sellers, and new price levels get set in many neighbourhoods. The record prices established in January and February have certainly set the tone for the rest of the year.  In the most typical yearly pattern for Toronto home sales, the highest prices are reached in May or June. We’ll have to see how it plays out in 2011.

Buyers can expect to see a greater supply of listings by April. Sellers can still expect to see strong demand this spring. They should keep in mind, however,  that a greater selection for buyers could mean fewer offers on each property. If you’re a seller, the key is to develop a pricing strategy with your agent, and set your listing price accordingly.

What’s going on with MLS?

You may have seen media coverage regarding potential changes to MLS. The MLS system used by Realtors across Canada is owned by the Canadian Real Estate Association (CREA). In 2010, the Competition Bureau entered into a discussion with CREA, indicating its concerns that the rules which regulate how MLS is used by its members might be too restrictive or monopolistic. Many Canadians have expressed strong feelings about this issue. In this post, I’ll put down my personal take on what it all means.

A little background…

The genius of the Multiple Listing System concept is this: it allows member Brokerages to share information, including much that is confidential, with other Brokerages who are all bound by the same rules of confidentiality and responsible use. It allows me, as a licensed Realtor, to “co-operate” with any one of hundreds of Brokerages in the GTA or beyond, in order to show or market their listings to my clients. (Note: the “public MLS” site, realtor.ca, is a separate marketing site, where confidential information has been stripped from the data.)

The benefit of MLS for Sellers is clear: their home can be marketed by all Realtors to their clients, rather than only by their own Brokerage. The benefit to Buyers is also clear: a client with any Realtor has access to all suitable homes, regardless of which Brokerage holds the listing.

There is a second benefit to Buyers that is crucial, but less obvious. The rules that govern the use of MLS by member Brokerages ensure the reliability of the system, and the data on it. Brokerages are responsible to ensure that the information they load onto the MLS database is accurate and timely. This means that if a house is advertised as having a private drive, the Brokerage has ensured that it does in fact have one. If a Brokerage advertises that the living and dining rooms have hardwood floors under the broadloom, and it turns out to have plywood, then the Brokerage is answerable to the Buyer. The measurements, legal descriptions, and tax information all have to be accurate. Every day, when Realtors bring their clients to one of my listings, they rely on the integrity of the information I have provided on MLS, which they pass on to their clients.

Why the fuss?

The complaint has been that since MLS is so widely used, it’s not fair to keep out folks who just want to get their house posted. In fact, some brokers for years have envisaged a business model where they could charge owners a small fee to simply provide a conduit for the electronic uploading of “for sale by owner” listings onto MLS. This would be something like Craigslist, though not exactly free.

One misconception is that until now there has been no choice in the price for Brokerage services. In fact, Realtors have been competing openly and aggressively for as long as I can remember, and wide varieties of pricing are being used every day.

As a member of CREA, my view has always been that the strengths of a well-managed MLS add a lot of value for consumers, both buyers and sellers. If changes can be made to increase the value of the MLS system, great! But I’ve always been aware that openness and competition are just pieces of the puzzle. Part of the responsibility of operating a web-based data system is to protect people’s privacy, under the federal government’s PIPEDA legislation. And as Brokerages we function in a regulatory environment under provincial statutes, which in Ontario include REBBA and the Consumer Protection Act. These laws demand strict adherence to rules about how business may be done, and who is permitted to do it.

What’s going to happen next?

CREA and the Competition Bureau have a tentative agreement, which needs to be ratified by CREA’s stakeholders across Canada. Until a firm agreement is in place, details will not be released. When the dust settles, expect both sides to claim victory without too much changing.

My guess is that CREA will find a way to spell out how some limited-service options can meet the legal requirements to be placed on MLS. Brokerages will still bear legal responsibility for their listings. As information technology continues to evolve, consumers will have more options for how they obtain information. And Realtors will continue to add value to their clients’ buying and selling. Some will provide narrower service options, and that will enhance the range of available choices.

My bottom line

As an experienced Realtor, I know that my work has provided value for my clients. By providing market analysis and negotiating skills, I’ve optimized their monetary outcomes. By providing psychological support and partnership, I’ve made a complex and scary process seem almost easy for them. A lot of what I’ve done for my clients has not shown up on any invoice (see my earlier post, 9 Free Real Estate Services.) I’ve also done my share of volunteer work in the community, and I know myself well enough. Whether the work is paid or unpaid, it’s still my work, and I don’t compromise on quality.

GTA Market Report – October 5, 2010

Toronto home prices moved upwards as expected in September. The monthly figure reported by the Toronto Real Estate Board was $427,329. As you can see in our chart, this outcome is completely consistent with the seasonal pattern, representing about a 4% increase from the August average sale price. The uptick from the summer low is similar in four of the last five years (with Fall 2008 being the obvious outlier.)

Why these predictable  month-to-month swings? Most people point to consumer psychology. It’s just more popular to buy a home in the spring or fall months. (And in real estate, higher volumes and higher prices usually go hand-in-hand.) The other factor seems to be the tendency for the higher-end properties to change hands far less during the traditional family vacation times.

Common sense suggests that homes don’t simply increase or decrease in value on an arbitrary month-to-month basis. Nonetheless, knowing when the peak times are likely might play a legitimate role in a seller’s decision on when to market his home. For instance, if we dig deeper into the Toronto sales statistics for the month just past, we find an even more intriguing pattern. On a week-by-week basis, average sale prices in the GTA market actually rose around 2.5% per week, or 10% within the month… that’s right, from about $405K before Labour Day, all the way up to $447K in the last week of September. This pattern may have little to do with actual value, but it says an awful lot about how people – and markets – behave.

Bidding wars are back in Toronto

I just did a search of recent sales in some of the key central Toronto districts. Over 44% of houses that sold in the last week in these areas sold over the asking price. This is a statistic which fits right in with springtimes from recent years, but it may be a surprise to casual observers who would guess that housing is still in a slump everywhere!

This winter and spring, agents were seeing what I called “underground” bidding wars… in which the final sale price was still below the list price, so that you would have to know the details about just how many buyers were making offers. When the price goes over list, it’s easier to assume that there was competition (or at least, the fear of competition.) So far in 2009, the actual sale prices are tending to settle 1% to 5% above list, whereas in recent years many bids would end up 6% to 15% over (or even higher.)

Prices close to a new high

So far this month, average prices in the GTA have been extremely close to the record highs from last April and May, but it doesn’t seem likely that May 2009 will set a new record. From most people’s perspective, it’s enough that the market is healthy and that buyers are finding attractive homes to buy.

Rosedale House Sales – Update

Rosedale houses - Ratio of Sale Price to MPAC Assessment

I was curious to see if the recent spate of sales showed a change of direction in the Rosedale house sales chart I posted last month. The last few weeks have added 12 more sales to the version posted in April.

As the chart shows , the volume of sales has picked up in the last few weeks. We’re back to a more typical 10 sales per month, compared to 2 per month in the depths of winter. The Price-to-Assessment ratio seems to be continuing in the same band as before, between 0.9 and 1.2. I’m not doing this chart on other areas at present, but I’d guess that homes in more typically-priced executive areas are selling at higher ratios.

These stats are clearly open to interpretation… My take is simple: in a local market where the median price is around $2 million, buyers are less motivated by cheap financing, and  more interested in fundamental value opportunities.

Analysis of recent house sales in Rosedale

Describing the price trend in an area of Toronto like Rosedale has always been tricky. There’s a small number of sales each month, and the price variations can be enormous (one house can sell for $700,000, and then the next one for $7 million.) Since 2005, the sale price average has been more or less flat, with occasional spikes. Over the last four years, the median price for detached homes in C09 dropped in 2006, in 2008 and and again in the current year, rising only in 2007.

Since Rosedale buyers and sellers are clearly plugged in to the financial buzz, I thought it would be interesting to do a chart with a timeline, covering Rosedale house sales over the past 12 months. What’s being measured here is not the sale price, but the relationship between the sale price and the latest MPAC assessment value, nominally referring to January, 2008.

Rosedale houses - Ratio of Sale Price to MPAC Assessment

Basically, this chart gives us a 12-month view of when houses were sold in the neighbourhood, and how each sale price relates to the current MPAC value. As you can guess, there’s a lot of wiggle room in this data. One person’s assessment might have been appealed, while another’s was not. MPAC values are generated by a computer program using broad strokes which are applied to entire city blocks or more. Likewise, we can safely assume that the really high-ratio outliers were recent, high-end renovations or new construction. In general, there’s always an expectation that actual market transactions can show a variation of, say, 50% when related to MPAC values.

It looks to me as if the common range of ratios last spring was between 1.1 and 1.5, while so far this spring shows ratios that are mostly between 0.9 and 1.3. It also seems that activity is starting to rebound from a mid-winter low. December, January and February showed little activity in Rosedale, as was true in much of central Toronto.

This chart is a new experiment… I’d be interested to hear from any statisticans about what I’m seeing here, or what I should be looking for. If you are interested in getting more details about local values affecting your house, please email me privately and I’ll get back to you.

Three reasons to buy

Elevated home prices in recent years helped make an economic argument for renting; conversely, lower prices today help to justify buying. Human nature being what it is, things don’t work out so neatly. When prices were at record highs, everyone wanted a piece of the action. Now that places are more affordable, some potential buyers think they might wait.

Are we missing something here? TD Canada Trust Mortgage Manager Patrick Lofto points out that “mortgage rates and property values typically have an inverse relationship.  Historically, as interest rates decrease we’ve seen house prices rise with an increase in demand.”  What’s different this year?  ”Mortgage rates and house prices (in general) have both decreased in 2009, creating ideal opportunities for buyers,” Lofto explains.

In fact, mortgage rates have dropped so much that savings in the cost of financing are now a major component in affordability for first-time buyers. Mortgage broker Paul Meredith has the following example: Someone who took out a mortgage of $300,000 a year ago, with a 5.99% rate amortized over 25 years would have a monthly payment of $1,917.  The same mortgage today at 4.19% would have a monthly payment of $1,609… a difference of $308!   Multiply that difference over the 5 year term and you’ve saved $18,480.  For any buyer concerned that prices might still fall a bit, today’s interest rates provide a great security cushion.

TD’s Patrick Lofto notes that the recent federal budget includes “a few perks directly affecting the housing market.  Increased withdrawal limits for the RRSP Home Buyer program and tax relief for home improvements are welcome changes.” Taken as a whole, Lofto sees the three elements — lower prices, lower rates, and more government incentives — as a signal to first-time buyers that this spring will be a great time to acquire a home.

Toronto bidding wars go underground

It used to be that we’d do a quick calculation… To get the number of properties that had sold in a bidding war, we’d simply go through the sales and find the results that showed a sale price in excess of the list price.

Today, we’re seeing only a handful of those over-the-top sales (yes, there have been some in Toronto this month!) At the same time, we’ve discovered a new phenomenon… the bidding war below the asking price. In the last few weeks, we’ve been presenting offers on homes, at prices that we (and our clients) thought were fair, but below the asking price. In each case, other buyers and their agents also came forward with competing offers. In the course of two or three days, these sellers were able to receive two or more competing offers, allowing them to pick and choose the most attractive bid, without the formality of a scheduled date for the presentation of offers.

These under-the-radar bidding wars have some distinguishing features: the buyers are competing not to over-bid, and are usually determined not to pay the list price; and they keep conditions in their offers (on financing, and home inspection). So it’s not so much a beauty contest to please the seller. It’s more about debating with yourself (and your partner) about how much the house is worth, and whether it offers unique qualities that won’t easily come up in another house.

This new kind of bidding war is hard to catch through the sales stats. It’s only happening in some areas of Toronto (or…  is that just because I don’t see what’s happening elsewhere?!) We think it’s another variation of the 80/20 rule. In this case, 80% of the buyers are attracted to 20% of the homes (it’s probably more like 90/10 in some areas). As more owners come to accept the concept of realistic pricing, we’ll probably see some well-presented listings this spring, which will start to generate a few more “real” bidding wars, where the properties sell over the list price again.

The current market is forcing buyers to think carefully about how much a place is worth. In our view, it’s never been about the sticker price… To make a smart buying decision, you’ve got to do your homework on each property!