How Is The Luxury Market In 2017?

I read an article in the Toronto Star on the weekend talking about the “luxury market,” which they consider $5,000,000 and up.

The drawback of being obsessive-compulsive and a complete control-freak is that I never trust anybody else’s numbers.

So I sat down on Sunday night, opened up Microsoft Excel, and started downloading data.

Let’s look at some numbers from the first five months of the year which I think will shock you…

WhatIsLuxury

What do you consider “luxury?”

I know, I know – you’ve heard this from me before.

I’m pretty sure I’ve crunched numbers like this in a blog post (or two or three…) before.

And each time we talk about the “luxury” market, I ask what that means to you, the reader.

I think it’s only fitting that I go back to this example, given we just lost Adam West on the weekend.

But when I think of how the definition of “rich” or “luxury” changes as time goes on, I think about the 1960’s Batman TV series.  The narrator always said “Millionaire, Bruce Wayne,” and stressed “Millionaire” like Robin Leach would have.

Bruce Wayne owned a massive estate, a family company, and God knows what else (along with the Bat-Cave…), and for somebody in 2017 to have what he had on that show, or in the 2000’s cinema remakes with Christian Bale, Bruce Wayne would have to be close to a billionaire.

What is a millionaire today anyways?  Is it significant any longer?

So when we’re considering real estate, and looking at “luxury,” we could look at any number of price points.

The term “luxury” is one that certain real estate brokerages in Toronto use, since it’s a term that luxury buyers want to hear associated with their purchases.

But the rest of us use the term “high-end” for that lot of real estate, since there’s really nothing “luxurious” about a $3,000,000 house in Toronto anymore.  In fact, some people pay that for raw land…

The Toronto Star article on Saturday, which you can read HERE, noted that Sotheby’s Real Estate reported a 62.5% increase in the sale of properties $4,000,000 and up between January 1st and May 31st, and so I just had to check and see if I came up with the same number.

I did not.

In fact, my numbers show me that there was a 120.5% increase in the number of sales of properties $4,000,000 and up in that time period.

The article says “Toronto-area,” so perhaps they’re looking at the 905?  Or Mississauga?  Or Oakville?

In any event, my point wasn’t about who had what number, but rather that as soon as I started looking at the numbers, I couldn’t stop.

Game 6 of the Stanley Cup playoffs is on right now, but honestly, I’d much rather be looking at these numbers.

So let me first start by looking at all the sales in Toronto in the first five months of the year:

January, 2016: 4,670
February, 2016: 7,583
March, 2016: 10,260
April, 2016: 12,016
May, 2016: 12,790
TOTAL: 47,289

January, 2017: 5,188
February, 2017: 8,014
March, 2017: 12,072
April, 2017: 11,630
May, 2017: 10,196
TOTAL: 47,100

So the sales figures for the first five months of the year are virtually identical.

And as we know, the average home price in May of 2017 was up 14.9% from May of 2016.  This is important because as we look at the increase in sales of properties in the so-called “luxury” brackets, one might argue that if prices were up 30%, then last year’s $2.4 Million sale would be included in this year’s $3M++ statistics.

But as you’ll see, the numbers are so big, that the increase in average home price doesn’t really play a factor.

Let’s start with the freehold properties.

Here are the number of sales from January 1st to May 31st, posted on the TREB MLS system, in both 2016 and 2017 in the $3M, $4M, and $5M price brackets

$3,000,000+
2016: 209
2017: 409
95.7% increase

$4,000,000+
2016: 74
2017: 160
116.2% increase

$5,000,000+
2016: 28
2017: 81
189.3% increase

I don’t know about you, but I’m shocked by those numbers.

And I would have thought that as the price bracket goes up, the percentage increase would go down.

To see a 95.7% increase in sales over $3,000,000 is eye-opening.

But how about the sales over $5,000,000?  Going from 28 to 81?  What’s that about?

Indeed, what is this all about?

Is this attributable to new construction – more McMansions being built while the market is hot, and more buyers for $5,000,000 homes that didn’t exist in years’ previous?

Does this have more to do with Baby-Boomers “cashing out,” and thus the market has been flooded with luxury homes?

Let’s look at the same data for condominiums, and see if the trend continues:

$3,000,000+
2016: 11
2017: 22
100.0% increase

$4,000,000+
2016: 4
2017: 12
200% increase

$5,000,000+
2016: 3
2017: 7
133.3% increase

Calculating the percentage increase with such a small sample size is silly, but what the heck.

Although as quick as you might be to dismiss the significance of these numbers because of the small numbers, I don’t think that’s fair.

Sure, only three condos sold for over $5,000,000 in the first five months of 2016, and maybe we can’t draw much of a conclusion from that.  But if seven sold in the same time period this year, along with the increases in the $4M and $3M ranges respectively, can’t we take those at face value?

So adding together the condominium and freehold numbers gives us this:

$3,000,000+
2016: 220
2017: 431
95.9% increase

$4,000,000+
2016: 78
2017: 172
120.5% increase

$5,000,000+
2016: 31
2017: 88
183.9% increase

The percentages don’t change that dramatically, but at least this gives us a completely accurate picture of what’s happened in the market.

So let me ask you guys – what’s more eye-opening, the number of sales over $3,000,000 going from 220 to 431?  Or the 183.9% increase in sales over $5,000,000, which is a price point that, a decade ago, was reserved for a small number of homes on Post Road?

With the dramatic increase in prices over the last few years, the $2M houses became $3M a lot faster than anybody could have predicted.

I’ve had a few experiences in this price point so far in 2017, and I couldn’t believe what I saw.

How about 28 offers on a land-value-only home, that sold for almost $1M over asking?

How about 7 offers on a $3.6M house, that sold for $4.7M?

There’s a common misconception among the buyer pool that the higher you go in price, the easier it gets.

It feels, to many buyers, like the sub-$1M market is just oh-so-difficult, due to the CMHC down-payment requirements, and that to get over $1M would ease their pain.

And to the $2.5M buyers, oh what life would be like to escape those move-up buyers in their area, if only they had the extra $1M to get into the next snack bracket.

But try being my client at $3.6M, and seeing a house sell for $1.1M over the list price.

At the end of the day, competition exists at every level.

And the sales numbers so far in 2017 show that there are a lot more people looking to compete…

26 Comments

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  1. Appraiser says:

    Despite the apparent “surge” in listings in May (many of which were re-lists of the same property), the level of inventory at the end of May is less than two months. A balanced market exists when there are 4-6 months of inventory. Hard to fathom how prices can moderate much in such conditions. Need way more listings.

  2. Appraiser says:

    Mortgage delinquency rates low in Toronto, Vancouver despite high prices: CMHC
    CBC News Posted: http://www.cbc.ca/news/business/cmhc-homeowners-debt-1.4158195

    1. Ralph Cramdown says:

      “Despite”? Nobody defaults when they could sell at a profit instead. Some people at CMHC are smart enough to know this.

      1. Kyle says:

        This is a myth – people default when they can’t afford their monthly mortgage payments (i.e. job losses or increasing monthly costs), it has little to do with whether prices are rising or falling.

    2. Ralph Cramdown says:

      You missed the money quote from that CBC article, IMHO: “The “Homeowners’ Debt at a Glance” report is a new product from Canada’s federal housing agency, and uses Equifax Canada data that covers about 85 per cent of Canada’s mortgage market.”

      Even Home Capital reported mortgage payments to the credit bureaus. Now it’s accepted that 15% of borrowers are getting mortgages from places like Louie’s Used Auto Parts and Alternative Equity Solutions?

  3. Appraiser says:

    Sotheby’s got this one right regarding the luxury market. (Recorded April 24)

    http://bloombergtv.ca/2017-04-24/news/sothebys-high-end-market-resilient-to-foreign-buyer-tax/

    1. JCM says:

      Is 20% really that outlandish? Prices dropped 6.2% last month. The market forces behind that decline (increased supply and reduced demand) seem to have accelerated further in June. If prices fall 7% in June, then we’re down 13% from the peak — in only 3 months.

      The projection of 20% to 40% declines over the next 5 years is bearish, for sure, but it’s also relatively conservative — 20% declines from the peak could realistically happen by the end of the summer.

      And what about the new AirBnB regulations? How many condos will hit the market when AirBnB gets banned for non-principal residences?

      1. JCM says:

        Hell, Richmond Hill is already down 20%.

        1. Alexander says:

          I seriously doubt your figure of 20% down in Richmond Hill. Are we talking about average or medium detached house prices? I would say they are lower 5-12% compare to crazy 4 weeks in Feb-March – depends on the location – but, no more than that. It takes us back about 1/2 year ago at most. I would assume that cheaper houses and condos are changing hands and more expensive are longer to sell, which influences the average/medium prices. Sky is not falling yet.

          1. JCM says:

            You can see the data yourself at Zolo: https://www.zolo.ca/richmond-hill-real-estate/trends

            The mean average sales price is back to 2016 levels in Richmond Hill, with sales down by 60% and inventory up by 50%. It’s similar throughout York region.

      2. Jeff says:

        Depends how you want to look at it.

        Prices are still up 20% from last year and up 15% from new years, they are down from one month previously.

        So if you have been sitting out of the market, we are back to April 2017 prices.

        1. Ralph Cramdown says:

          Reality does not depend on how you look at it. In April, a seller could be fairly confident of achieving market price after a week or two on the market, and a buyer/borrower could be fairly confident that his lender’s appraisal wouldn’t present much trouble. From what I understand, neither is very true right now, so even if “fair market value” of a given house is the same as back in April, achieving it quickly is a very different proposition.

          1. JCM says:

            When you sell an asset in the open market, you determine its fair market value. If you can’t sell an asset for a given price when you list it on the market, by definition that price no longer represents fair market value.

    2. Appraiser says:

      Madani has been one of the big-name bears for the better part of a decade. Being wrong consistently year, after year, after year, is no reason to expect that he can’t be spot on this time. Broken clock and all that jazz.

      Studies have shown that the more bold the prediction, the more likely it is to be believed and the more likely it is to be wrong. Humans appear hard-wired to be knuckle-heads.

    3. Jack says:

      When the prices go up 30% in one year, they can just as easily go down 20%. The fundamentals (the number of people and the number of homes) don’t change drastically in a year or two.

      According to numbers from TREB, a 20% drop from the average prices in April would only take us back to the prices of about 12 months ago. That would be bad for some speculators (including the investors with negative cash flow); it would not be a big deal for most other buyers and sellers. A 40% drop would take us back about 3 years; that would be more serious, although improved affordability could be a good thing in the long run.

    4. Alexander says:

      The guy quoted in the article was predicting the housing prices going down for the last 5-10 years. .

      1. Kyle says:

        Madani has a flawless record…

        …of being dead wrong.

  4. steve says:

    OK, so every news outlet (including Realosophy) claim listing are up and sales are sliding, but here things are looking up (and your $1 million is just not worth all that much anymore, except most people only have it in the form of “credit”). So, where are we really?

  5. JCM says:

    These numbers aren’t all that surprising. That is what price appreciation looks like. Also, luxury homes have been the preferred asset for non-residents wishing to park cash in Canadian real estate.

    What would be much more interesting to me would be how the top of the market has responded to the Non-Resident Speculation Tax. My guess? The top of the market has slowed dramatically.

    Year-to-date figures for 2017 are pretty uninformative right now, given the shift in the market.

  6. Joel says:

    I find it interesting that $3 million plus is no longer saved for the top 3-4 neighbourhoods in Toronto. We now see these numbers everywhere, from North of the 401 East of the Don and in areas that were not considered as desirable 5 years ago.

    1. Geoff says:

      Bridle path has alwasy been pretty desireable though

  7. Ralph Cramdown says:

    It’s a tough market! Some buyers at these price levels are worried about being priced out of certain neighbourhoods, maybe forever.

    But there’s a new option that stretched buyers in this segment should seriously consider: Co-ownership. Buying with friends, or with a family you haven’t met before but who are interested in similar properties can double your buying power. This can help keep your children within walking distance of the academies they attend, and allay fears of falling off the property ladder into a less desirable neighbourhood. And it’s a great way to form a lifelong bond with a similar family with similar goals! Financial institutions are now offering mortgages tailored to these ownership structures, and they are becoming increasingly popular. Some experts say that, as they gain acceptance in this segment, more individual high-net-worth families will be priced out by pairs and triples of their peers, so it may be best to go with this structure on your next move up, or face an even greater risk of being priced out in the years ahead.

    As always, competent legal advice and a contract spelling out all the parties’ rights and responsibilities are a must. There have been a few cases where disputes over the division of space in the wine cellar, the protocol for wiping off the exercise machines in the home gym, or who gets to hire the landscaper have escalated into some expensive and unfortunate litigation.

    1. Geoff says:

      I don’t often agree with Garth Turner but he’s right about one thing – don’t buy real estate with anyone you’re not sleeping with seems like solid advice.

    2. P. J. Onzi says:

      God help anyone —- enough to consider this. But thanks again for the contrarian signal.

  8. Jack says:

    Good work again, thank you. But we still don’t know what the price inflation is in each of those brackets. Increasing number of sales in a given range is an indication of inflation, but it could be explained by other factors as well. It would be good to have some control points — properties that were sold in 2016 and then again in 2017.

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