Maybe I’m just opening up another can of worms here, but I want to go back to last week’s epic discussion about the average Toronto home price, my predictions about the possibility of an increase in that statistic this fall, and an examination of where that number comes from.
Many will suggest that a Realtor trying to downplay the significance of a negative statistic is just more snake-oil selling, but I think my regular readers know that I write what I believe.
I really, truly believe that the $732,292 number representing the average sale price of a Toronto home this past August is misleading, so allow me to explain why…
The stakes have never been higher for bulls and bears.
The bears smell blood in the water, and they’re coming out of an epic hibernation.
The bulls believe in their position, and will defend it until the bitter end.
In a market of ups and downs, short and long term, I think it’s fair to say that both bears and bulls can be correct, at the same time.
But in the past week, I have never seen the kind of passion, and at times, animosity, coming from the mouths (and fingertips) of said bulls and bears.
Even politics doesn’t get this messy.
Last Tuesday’s blog post spawned a record near-200 comments, and while many of the comments were from a handful of loyal and passionate blog readers, engaging in a very rare – for the 2017 Internet, un-moderated debate, an incredible number of people weighed in with their opinions on the future of Toronto real estate.
I usually know when I’m about to light a fire, and walk away.
If you’ve been reading TRB for a decade, you know that sometimes I’ll post a blog because I know it’s going to result in debate.
But to be honest, I had no idea what a hurricane last Tuesday’s blog was about to cause.
My predictions were honest, and so I thought, reasonable.
Dare I say, in my mind, they were obvious.
The average sale price in Toronto fell to $732,292 this past August, from a peak of $920,791 in April. Everybody and their drunk mother know this number will be higher by the end of September.
So I thought, perhaps rather naively.
Perhaps I underestimated the number of market bears out there, and while some have suggested that the “bulls” and “bears” label are too form-fitting and restrictive, I really do think that there’s little room for an in-between.
A cynic would suggest that the bulls own real estate, and the bears do not.
I could easily create a fictional “bear” who passionately, and at times of late, aggressively, states his or her position on Internet forums. This is a would-be 2007 real estate buyer, who heard the market was going to tank, and held off on purchasing. The $1,000,000 house that he or she eyed in 2007, gained, and gained, and gained, hitting somewhere in the neighbourhood of $2,400,000 earlier this year. “Denial” isn’t a river in Egypt; it’s a character trait that we all possess, and many demonstrate in times of complete and utter dismay.
If I were a person who read the wrong article, took the wrong advice, or believed so hard in my own hope/dream/prayer that I cost myself a lifetime of tax-free capital gains I would never make back, then I might be angry too.
But reading the comments on many online newspaper articles, I just can’t get over the level of anger that exists.
Real, true, anger.
It’s present in every comment section of every newspaper article about real estate this month.
I’m blessed to have a readership on TRB that is far more savvy, informed, and respectful, than what trolls around the Internet. TRB’s bulls and bears throw statistics like adults; not feces like monkeys.
But online – just, wow, I can’t get over it.
The Globe & Mail wrote just about the only positive article about the Toronto real estate market last week: “The Buyers Are Back In Toronto’s Housing Market.”
The comments, which have now been closed, were beyond angry.
Many readers took to calling this “fake news” and suggested that there was some sort of conspiracy between the Toronto Real Estate Board and the Globe & Mail to publish false information.
Here’s a sample of the comments:
“Yet another sponsored article by TREB/agents.”
“This article is FAKE NEWS! This market is about to plummet another 20-30%.”
“This is complete propaganda from the RE industry! G&M needs the cash (advertisement) and will print anything these guys will tell them to.”
“G&M you will go bankrupt if you continue to post realtor propaganda. Pathetic and laughable article.”
Where does all this anger come from?
And tell me if I’m wrong here, folks, but I believe that you are far, far more likely to predict a market crash if you want it to happen, then if you don’t.
I also think that the people that are the most angry, and screaming the loudest – throwing around “fake news” tags like those above, are far less likely to own real estate.
I’m not saying that all market bears are non-owners of real estate. But I’m saying that not owning real estate is a fantastic reason to have a bearish outlook, and delude yourself into thinking a 50% market crash is coming.
So with that out of the way, and keeping in mind that this was just supposed to be the lead-in for the actual meat of today’s blog, let me get back to the decline in average home price.
I made two statements last week that I think many people disagreed with:
1) The average sale price of a Toronto home will increase in September and October, over that of August.
2) The average sale price of a Toronto home, reported in August, of $732,292, is misleading.
I stand by both of those statements, and today, I’m going to double down.
The reason why I ‘predicted’ that the average sale price in Toronto would increase in September and October isn’t because, as some commenters suggested, I was biased, or cheerleading, or pumping tires, or “trying to change the psychology of the buyer pool” (which was flattering, for somebody to think one blog post on the entirety of the Internet could have that effect), but rather because I figured that was a slam dunk.
The average sale price dropped 20% from April to August.
But the value of Toronto homes didn’t drop 20%, or anywhere near it.
This is what I mentioned last week, and have said in a number of media interviews – that the average home price decreasing 20% on paper has not translated in practice.
Not even close.
Yes, the average sale price reported by TREB has dropped from $920,791 in April to $732,292 this past August.
But I, or anybody else, nor you if you tried, can find a $1,000,000 house that’s selling for $800,000, or a $500,000 condo that’s selling for $400,000.
So ladies and gentlemen, get ready to throw the “fake news” tag at me when I suggest that the average sale price reported in July and August does not reflect the average value.
The two simply are not aligned.
Yes, I agree that values are down, the market has changed, the market has declined, the psychology has changed, and we’re in a far more balanced market. The spring conditions are long-gone.
But the numbers, on which the media, and the bears, want to focus, are exacerbating and exaggerating the decline.
Over the past month, I have offered two reasons for this:
1) Fewer houses are sold in the summer, as the housing market is more cyclical than the condo market.
2) Far fewer luxury houses are sold in the summer, because luxury homes are always marketed in the spring.
So let’s look back through the first eight months of 2017, and see how each of the nine home-types that TREB tracks represented all the home sales, on a percentage basis.
Many of you won’t be familiar with these home types, but I figured I’d show them all, as TREB does.
A “link” house is a freehold, which is linked underground via the foundation, but might not be linked above ground, like a semi or a row.
A “co-op” apartment and a “co-ownership” are essentially the same thing, as far as I’m concerned. Both fall under the “condo” umbrella.
A “detached condo” is something, to be quite honest, I have never seen and really don’t understand, and perhaps that’s why the numbers are so low.
In any event, you know what detached, semi-detached, and rowhouses are (the latter shows as att/row/twn on MLS for attached-rowhouse-townhouse, simply meaning it’s attached at both sides), and you know what condo apartments and condo townhouses are. The rest are such small percentages, that they’re not really important.
Here’s how the percentages break down:
I think it’s important to note, more than anything, how the percentage of detached homes, which are the holy-grail of houses, and clearly the most expensive, peaks in April at 49.1%, which of course, we know as the peak of the average home price, and valleys in August at 40.6%.
Those nine categories are confusing, and unnecessary, and I’ve really only included them to be exact.
Let’s add together the freeholds (detached, semi-detached, rowhouse, link house) and label them “Freehold,” and add together the condos (condo townhouse, condo apartment, co-ops, detached condo, and co-ownerships), and label them “Condo.”
Again, we see the trend continue.
The month of April saw 67.3% of all sales represented by freeholds.
That number dropped dramatically to 60.3% in August.
You might think 6% is insignificant; a ’rounding error’ you might say.
But if the average freehold price in Toronto was, say, $1,000,000 in August, and the average condo price was $500,000, then seeing 6% fewer freehold and 6% more condos in August, than in April, is clearly going to change the resulting average sale price.
If we saw the same 67.3% and 32.6% ratio of freehold to condos in August, as we saw in April, the $732,292 would be significantly higher.
If we’re truly going to compare apples to apples, and compare the average sale price in April to the average sale price in August, then we need to consider what the average is averaging.
In this case, we’re averaging a different set of data: far fewer houses, and far more condos.
We all know that the real estate market is more cyclical for houses than it is for condos.
Who owns houses? Primarily families.
What do families do in the summer? They vacation. They send the kids to camp. They do not diligently and feverishly partake in the real estate market, as they do in the spring, and the fall.
That “average sale price” in August is skewed because of the sample being taken.
And it’s for this reason, going back to my blog from last Tuesday, that I figured I had a “slam dunk” prediction when I said the average sale price in September will be higher than August.
I still believe that.
As to my second point, about the luxury home market, consider the following:
Now first and foremost, I don’t consider a $2,000,000 home to be “luxury” in Toronto any more, but TREB uses this as the highest price point tracked, so let’s work with what we’ve got.
Just as I suggested that there are more houses, as a percentage of sales, sold in the spring than in the summer, I am have suggested that the same is true with respect to the higher-end homes.
This chart proves that.
We saw another peak (a continuing theme) in April with 10.1% of all sales for detached houses topping $2,000,000.
in August, that number plummeted to 4.3%.
Once again, you have to figure this will have an affect on the average sale price.
Those $3 Million, $4 Million, and $5 Million homes that were listed in the spring, were not listed in the summer.
And while you might say, “If home prices decreased, then a $2,100,000 house that sold in April, and is included in those 579 sales, would sell for $1,990,000 in August, and wouldn’t be included in the 112 sales,” I would agree, but, I would suggest that we’re talking about a literal handful of properties that fit that description.
For the most part, we’re talking about 6% fewer luxury homes being sold in August, than in April.
Bottom line, folks: I’m telling you from experience in this market, that the 20% drop in average sale price, on paper, has not translated to an actual 20% drop in sale price, in practice.
I’m not seeing out there, and neither are my colleagues.
Ask your friend from work who is looking at houses every weekend – the drop isn’t there.
5%, 10%, whatever you want to call it, depending on the location, and property type.
But just as I “predicted” last Tuesday that many buyers would be caught off guard with respect to market dynamics, I also think they’ll be caught off guard by market price.
Just as they’ll be caught off guard if they’re not expecting to see “offer nights” on freehold houses, and houses selling quickly, they’ll be caught off guard if they’re looking at a block of houses worth $1,000,000 in the spring, thinking they’re going to pick one up for $800,000.
To answer a few commenters from last Tuesday’s blog – yes, if I’m wrong about the average sale price increasing in September, I will absolutely admit that I was wrong, and post a photo of myself on Instagram wearing a dunce cap.
So long as you understand and acknowledge that after ten years of blogging on TRB, I write what I believe to be true, not what I want to be true. The formula for many market bears, ironically, is the exact opposite…