Everyone’s talking about the Toronto real estate market slowdown, evident in the spring sales numbers, but we’re not worried. This is what happens when the government gets involved. It’s practically clockwork.
Over the last five years, April to May sales activity and prices tended to stay roughly neck and neck. But this spring April and May numbers varied considerably, marking an almost 6% drop in the number of downtown Toronto condo sales and a decreased average PSF for all Toronto condos, down -2.85% in the last 60 days.
Number of condo sales in downtown Toronto in April and May over last 5 years:
The slowdown coincides directly with the introduction of Ontario’s Fair Housing Plan and the Non-Resident Speculation Tax, announced in late April. Government intervention seems to have scared away buyers. As sale transactions fall off, current prices start to dip. This is unusual, however, since it coincided with the annual spring increase in supply, which seems to have caught up with demand. There should be a flurry of action right now. But we’re not seeing that. The intensity that we experienced in March has all but disappeared.
And yet doesn’t this all look familiar? Governments have intervened in real estate before, and buyers and sellers always react in the same way. If history has anything to say about it, the market is going to bounce back by the fall.
Real estate market slowdowns in Vancouver and Hong Kong
Let’s rewind the clock a year. The Vancouver real estate market was going crazy, people were screaming about a bubble, and the government decided it was time to act. With a flick of their legislative wand, the B.C. provincial government introduced the 15% Foreign-Buyer Tax.
The initial impact of the tax was ambiguous, but slowly the numbers started to show signs of a slowdown. Buyers either fled the Vancouver market completely or else adopted a cautionary approach. Consequently, residential property sales in the Metro Vancouver area totalled 1,523 in January 2017, a 39.5% decrease from 2,519 sales in January 2016. The legislation had done its work well, Vancouver buyers and sellers were scared, and ‘waiting it out’ became the name of the game.
Throughout the winter and into the spring, detached home sales declined and demand for more affordable options like townhomes and condos in Vancouver increased. In short order, the supply could not keep pace with demand and condo prices started to creep back up.
In January 2017, the average price of a condo apartment in Vancouver was $512,300, according to figures released by REBGV. By May 2017, the average price was up to $571,300. That’s an 11.5% price increase over the winter and spring.
A similar trend occurred in Hong Kong in November 2016, when the government implemented a 15% stamp duty on all non-first time buyers. In December, immediately following the tax increase, residential property sales in Hong Kong were hit with a slowdown of 47.3% month over month. But it didn’t last long. Demand shifted to smaller, more affordable properties, causing significant price increases in the range of 15% for February 2017.
Final numbers for February showed the number of Hong Kong property transactions had increased 2.3% year-over-year. Despite government intervention, continued domestic demand and low-interest rates drove Hong Kong’s residential market growth at 1.6%. Now, Hong Kong’s residential capital values are expected to rise 10-15% in 2017.
What happens when the government causes a real estate market slowdown?
The story goes like this: The government intervenes in the real estate market to curb rising prices, often implementing a new tax or regulation on purchasers who they deem are the troublemakers.
The tax or regulation cools the market as intended, causing the targeted troublemakers to back off, but also causing everyone else in the market to take cover. Regular buyers go into hiding. Sales start to slow down. In the immediate decrease of buyers, active listings sell for a less competitive price and the market takes a dip. The government pats itself on the back, the public murmurs about price drops, market crashes, and the ‘wait-and-see’ mentality takes hold.
The buyers who continue to open their wallets turn their attention to more affordable properties. The new tax has inflated the market and made detached homes and larger properties too expensive and too risky for most buyers. Even the most daring real estate players are still breathing that cautionary air.
Sales of detached homes and luxury properties fall off, and buyer demand shifts to less expensive condos and townhomes. But as demand grows, prices for these units start to rise as well. Sales activity and price growth in the condo and townhome market renew the public’s faith in real estate investment. Buyers return from hiding, and the process starts over.
Average PSF for condos sold in downtown Toronto in April and May over last 5 years:
The 2017 spring dip in average condo PSF in downtown Toronto is an indication that Toronto is experiencing that initial phase of less competitive sales. But this dip is simply the first part of the process.
As in Vancouver and Hong Kong, the prices will bounce back and demand will shift to more affordable Toronto condos and townhomes. The increased demand will drive up prices, and within a few months—by the fall we expect—the Toronto condo market will be showing significant increases. Buying now while others are fearful is the advice of the hour, and sell in the fall when others get greedy.