Canadian real estate sales have been impacted by the pandemic in an unexpected way. RBC Economics recently unpacked a trend of rising condo apartment listings. Dense cities filled with condo apartments, are seeing sellers flood the market. Meanwhile, mostly detached suburban markets are seeing inventory heading in the opposite direction.
Toronto Condo Listings Rise 134% In The City
Greater Toronto real estate is seeing a lot of condo sellers hit the market, especially in the City. The City has 134% more condo listings in September, when compared to last year. To contrast, detached home listings are down 12% over the same period. The 905 suburbs saw a similar trend, with condo listings rising 82%, and detached listings falling 34%. Not quite as extreme, but the suburbs are seeing more condo sellers as well…CLICK for complete article
The newly active listings in September set another all-time high with over 3200 properties going up for sale. This marks the 6th straight month that newly active condos have doubled the sales totals. The oddity is the sales were loudly spoken of, but the new inventory was whispered. Prices were able to inch up despite a majority of the areas inside of the Greater Vancouver condo market off double digit percentage points, with 2 outliers being off 50%+ from their individual market peak’s.
Prices have come down from the peak by 7%. The surprising part of this data point is, when you take the current data of the 19 regions which make up Greater Vancouver, there are 12 regions down 10%+ from their individual peaks. Of those 12, 5 of them are off 40%+. Understandably the Real Estate Boards recorded data kicks out an outlier or two to give accurate data. It is just surprising that the data indicates only a 7% drop from peak.
The data does have room to run higher before testing the possible downtrend. There could be room for some unusual price activity during the remaining portion of 2020 and into 2021. As those presale completions close. They will inevitably come to the market to be resold. Many will experience losses, some getting out by the skin of their teeth, and the fortunate will walk away with profits.
Technically speaking the downtrend indicated by the yellow line has never been tested since the inception, coupled with a second test to break above the upper echelon channel. The first attempt during March failed.
The preceding two years had clearly an up and down effect on prices. 2018 achieved peak prices with an average sales price of $751,632. 2019 prices fell more than $100,000 from the highs in 2018. Currently the 2020 prices are $50,000 higher than the low in 2019. The probably scenario is the market is creating lower highs coupled with lower lows which will see the market bottom occur during 2022.
Those presold condos could affect the data in a unique way over the short term. Presale prices do not count towards the MLS monthly average sale price data. Meaning those high valued, small square footage properties will be calculated into the average sales price for the first time. Even as the majority of sellers will lose based on their original purchase price, carrying costs, commissions, the high average sales price could bump the data higher, possibly even as high as the previous peak due to the artificially added value of high valued product newly added into the data metrics. If this does occur, this will likely be a temporary head fake. The growing need to sell has already pushed inventory to the highest levels in the past 5 years. Look at the price chart and the last time inventory was above 7000 actives, price action was very volatile, and could not propel beyond the technical price range. This is what will continue to occur over the upcoming 2021 and 2022 as inventory grows with the need to sell intensifying.
As mentioned active listings are at their highest point in the past 5 years. The seasonal norms, will likely take hold, but given that it is 2020 anything is possible. Due to the lockdowns during the spring the normal activity has been pushed back to later months. September ended with 6279 available condo listings.
The market has continued its record breaking ways again in September with over 3250 brand new listings on the market. Again seasonal norms should take hold, however over the upcoming two years the market is likely to experience 8000+ active listings, with a high probability of 9000 available units which would be an all-time high for Greater Vancouver.
The cannibalization of the market will begin after the majority of presales have completed. Once that occurs and inventory is 8000+, any unit in an older building will have very little chance of selling. The new warranties that come with the new buildings, along with the lower insurance fees, and just the overall new penny effect, will cause older units to be left with very little ammo in the chambers other than lowering their asking prices. This will ripple to the newer units, and the chase lower will have begun.
Sales did finally come through higher sales compared to the past 3 years. Which has had some perennial real estate bulls very excited. But only if you compare the data directly with past September’s. Not when you compare it to previous high water marks of any calendar year. The 1598 sales which took place in September did break out of the stagnant sales range, however when compared with previous years high water data points the sub 1600 sales is hardly anything to write home about, let alone be the headline. Add on the fact that there was the highest availability in 5 years and the newly active listings has doubled the sales for 6 months running. Eventually there will be a straw that breaks the condo’s back.
First-time homebuyers were warned at the beginning of the pandemic, and a lot didn’t listen. Now some are seeing exactly what the Canada Mortgage and Housing Corporation (CMHC) warned. Canadian Real Estate Association (CREA) condo apartment price data shows a few markets have seen buyers lose a chunk of their down payment. There are some exceptions, but two of the largest condo markets were not.
Today we’re looking at two calculations, the return on investment on a 5% down payment and estimated equity. The first, assumes a 5% down payment because it’s the demographic the CMHC warned not to buy. The return is the change in condo prices from April, minus cost of mandatory insurance. This number excludes a number of costs, notably land transfers and closing. Returns are therefore higher than reality in these estimates.
The second number is an estimate of how much equity the condo buyer has remaining. To get this, we’re taking the current benchmark value, and subtracting the mortgage. We then remove principal contribution to the mortgage, factoring a 2% mortgage rate. The result is the estimated equity a condo buyer has, after the above costs with a few months payment…CLICK for complete article
Canada’s largest bank is prepared for the wave of mortgage defaults coming. Phew! Wait… what defaults? RBC Capital Markets sent a research note to clients last week. In it, the analysts mention up to a fifth of deferred mortgages are at risk of default. It’s great the bank is well prepared for this event, but it does bring up a lot of questions. Most notably, how effective are the Bank of Canada (BoC) policy measures? After all, the default rate RBC is forecasting is higher than the BoC said would happen if they did nothing at all.
One In Five Mortgages Deferred May Default In Canada
RBC sent a research note to institutional clients that mentions upcoming mortgage defaults. In the research note, they state “we believe 10% to 20% of mortgages under deferral are at a higher risk of defaulting.” Further adding, “if 20% of mortgages under deferral eventually become delinquent in Canada, this equates to a mortgage delinquency rate of 2.3% which is almost 4 times higher than the peak Canadian mortgage delinquency rate over the past 30 years.” Even at that rate, it’s still relatively low in the grand scheme of things. However, as the analysts note, it’s higher than Canada has seen in recent history…CLICK for complete article
Highs sale numbers and increased prices come as a relief to many homeowners looking to exit the Greater Vancouver market during September 2020. Entry level markets have seen near term highs in prices while the higher end market has begun sell albeit at much lower than expected prices. The beginning of the school year had a major imprint to the 2020 Real Estate Vancouver market. As the colossal impact of the Covid-19th dust continues to settle, we anticipate less ferocious purchasing going forward, as the pent up demand has seemingly been relinquished with the return of the school year.
Diving into the data, the completed sales did occur in higher volume, many of which were for multi million dollars. The high end of the market was very active this month with seemingly money flowing from weak hands to strong ones. A property was listed for 13.388 Million in 2019, cancelled early in 2020 and then relisted during May at 12.998 Million the sale just was achieved at 9.85Million a cool loss of 3.538 Million dollars. Another seller who achieved a sale had been waiting for more than one year. A property that had been on the market for 533 days just sold for 4.7Million, a nice sale price however, the original ask was 6.88 Million in 2018 then 5.68Million during 2019. The eventual sale price was 2.18 Million less than the asking price during 2018. Even while these sellers were bent over the proverbial barrel the high end sales enabled the average sales price to increase to just over 1.7 Million.
Technically speaking, current prices are testing both the long term downtrend and the low end of the upper echelon in the current market cycle. A triple top indicates a market reversal. That triple top occurred over the course of 2016 -2017. That triple top began the overall downtrend orange line that has forced prices lower and ultimately to test the long term uptrend indicated by the black uptrend lines on the chart. Due to the triple top prices did break below the upper channel of the long term up trend during 2019 which sent prices to the upper end of the low echelon. Eitel Insights believes the triple top and subsequent downtrend will again test the prolonged uptrend and eventually break the trend, which will force prices to retest the low end of the market cycle.
The Real Estate Board has been reminding everyone how well sales during September 2020 are doing compared with September 2019, they conveniently leave out that compared to the overall peak (peak price 1.830 Million), prices are still down 7% along with lower sale numbers. Eitel Insights had indicated over the past year or more, any property can sell, however at continually lower levels until the market bottoms likely in 2021 for most areas across Greater Vancouver. The many examples of current homeowners having to chase the market lower will ultimately push prices to retest the prolonged uptrend.
Going forward we believe the demand will dissipate, as that rush to buy land before the school year was a major factor in the recent bump to sales data. The Covid-19 reaction had families moving from condos to a detached property which caused a spike in completed sales. The sales total which is taken from the amount of completions at land titles accumulated to 1325 which is the highest over the previous 3 years. 2020 has changed the way many people work and how youngsters are learning. If a hard second shut down was to occur parents would become teachers again. The desire for the kids to have a back yard to play in has massively increased. With parents knowing this year mattered more than past or even upcoming years we believe that is what drove the completions during September to be the high water market of the current sales cycle. As time wears on Eitel Insights does not believe this type of intense demand will keep up.
The Detached inventory has remained low during 2020 and is still lower than December 2018 data with only 4773 active properties. Contrast that with the Condo market hitting the highest new monthly listings in the past 15 years and the contrast of the two market becomes obvious. The rapid demand for a back yard from young families surely gobbled up many of the newly listed properties.
The overall inventory did not increase for the first time in the past several months, however the new monthly listings hit the highest since in over a year with 2042 newly activated detached listings. As suggested in months past the seasonal norms will likely not hold true for the remainder of 2020.
The previous yearly high water market for new active listings has always occurred before May each and every year except for 2009 and now again, here in 2020. The major difference between now and then…. No 2010 Vancouver Olympics around to corner to ensure construction and the actual economy doesn’t stop, rather than a couple governments offering meager handouts in order to be re-elected.
The effects of the Covid-19 impact is still percolating in the real economy. While yes, offering free money to everyone, whether previously employed or not, is a boon to the economy at the beginning. Longer term, this will mean more taxes. An unwelcome thought for business owners who are already struggling to keep their doors open. Secondary properties are hitting the market in droves already, as the condo inventory hits the highest point in the past 5 years.
In summary, September was a nice bump higher and ideally sellers took advantage, but ultimately, this great data point, in hindsight, will be seen as nothing more than a lower high on the way to the bottom.
Our friends over at The Green Mortgage Team sent us this informative article on whether now is the time to lock-in your mortgage. ~Ed
It was quite a bumpy ride for rates in the past two months. Fixed rates dropped in early March, and then rebounded quickly from their lows only about a week later. The spreads over bonds jumped up due to liquidity issues in the market, as well as, a higher risk premium being associated with lending.