Juggling Dynamite

The average sale price for a Toronto home in July was $1.02 million (Toronto Regional Real Estate Board), down $133,075 (11.5%) from June 2022 and +0.2 percent or $2,520 compared to July 2021. Sales were down 44%, and active listings were up 25%, while the stockpile of available homes was up 58% from a year ago.

Over the last six months, Toronto’s average sale price has dropped more than $500,000.

So much for all the hopium about “rich Torontonians” being rate insensitive; high-priced houses are seeing some of the deepest declines:

It would appear that eroded affordability is hitting Toronto-based homebuyers the hardest; detached prices in the city proper are down 7.3%, though still sit at a hefty $1,515,762, with sales down 46.9%. Compared to February, when the average exceeded the $2M mark, Toronto house prices have slid a whopping $558,226 (-26%). A large chunk — a difference of  $221,250 — has been lost in the last month alone.

Declines are still steep, though slightly less pronounced, in the 905 markets. TRREB reports prices have dropped 1.9%, to $1,320,269, down by $407,694 from February (-23.5%). Month over month, they’re down 3%. Sales in the suburban and exurban markets are down 46.9%, says TRREB.

This predictable but widely unexpected downturn (after prices doubled in record time) is sparking a classic cash crunch among highly leveraged owners and their lenders; see Goodbye housing bubble, you won’t be missed:

House flippers thought they’d actually earned something, when they often just shuffled money around and waited. Now they don’t want to admit the fun is over, and figure if they just sit tight long enough, the market will turn foolish again and they can still get their big cash-out.

Related trouble in the illiquid private equity world is just beginning as funds will be forced to mark assets to market and sell some properties to meet redemption requests; see investors sell stakes in buyout funds at a record pace.

And then there are all of the institutions, pensions, family offices and other investors who piled into ‘alternative’ funds concentrated in real estate and related lending as well as high-risk venture bets during the ‘easy’ money era. As debt and equity prices tumble, required rebalancing and redemptions naturally force selling in the ‘alternatives’ where illiquidity tends to magnify price discounts. For a taste, see: Market Rout Sends State and City Pension Funds to Worst Year Since 2009. Meanwhile, the private equity and real estate losses since March 31st have not yet been reflected in portfolio values.

Alfonso Peccatiello of The Macro Compass joins the show for an epic conversation on the current state of the economy and financial markets. Recession, inflation, foreign currencies, real estate, and much more are covered as Alfonso applies his decades of expertise to provide you with actionable information that can assist in your own investment portfolio. Here is a direct video link.

As prices rose, industry participants urged policymakers to stimulate supply with tax incentives and enable demand with easy credit; now that home prices are falling (as they should), the same people are urging policymakers to help prop prices up. 😊 Quick profit, not affordability, was always the goal and that golden goose is now dead.

The giveback phase is a whole new world. As with many asset markets today, power rests with those who watch from the sidelines with low leverage, patience, defined rules and cash.

John Pasalis, President of Realosophy Realty, joins BNN Bloomberg to discuss the latest Toronto housing data that show home sales in July plunging 47% from last year. Pasalis says the transmission of monetary policy into the housing market is destroying demand, and sees sluggishness continuing into the fall. He expects more stability in the market with fewer distress sales. He says it’s now a buyers’ market, but adds buyers should watch out for quick price drops. Here is a direct video link.

Steve Saretsky, a Vancouver realtor at Oakwyn Realty, joins BNN Bloomberg to discuss the July 2022 data for Vancouver home sales that showed a plunge in sales. He says home sales tend to drop precipitously when mortgage rates move north of 3.5%, as there is too much indebtedness and leverage in the housing market. Saretsky says there’s very weak demand and low inventory in the Vancouver market right now and he doesn’t see an imminent rebalancing. Here is a direct video link.

Note:  Saretsky states that just 34% of homeowners have a mortgage. In fact, the latest  Statistics Canada data shows that, as of 2016, approximately 30% of Canadian households were mortgage-free. The confusion may be that some two-thirds of Canadians are homeowners, and half of them (about 33% of Canadians overall) reported being mortgage free.

Incomes are higher than the national average in the Greater Toronto and Vancouver areas, but so are property prices. According to a Forum Research Inc. survey, of those with a family income of $100,000 and higher, 62% had a mortgage.

In 2019 (see here) , the median mortgage owed was $200,000, and nearly 9 in 10 Canadian homeowners aged 25 to 44 (88%) had mortgages. On top of this, about 13% of Canadians had an outstanding balance on a home equity line of credit (HELOC) attached to their primary residence. Nearly three-quarters of Canadians (73.2%) had some type of outstanding debt.

As home prices ballooned since 2019, indebtedness and mortgages also ballooned. See more recent stats here.