Now see if you can guess the question!
Yes, kind of like Jeopardy! Whoever thought up the idea for a game show where you provide answers instead of questions? The first producer on the receiving end of that pitch probably thought the idea was insane…
So 26.9% is the answer to what question? Well, how about, “What statistical reasoning do you have for why the Toronto real estate market has increased so dramatically in 2016?”
Now what does 26.9% actually refer to? You’ll find out…
Do you watch Jeopardy?
Do you ever feel bad for Alex Trebek?
I mean first of all, pretending you know the answer to every question has to get old. And even Alex must have a burning conscience sometimes.
Every time somebody gets an answer wrong, Alex always plays coy and says, “Nooooo……sorry, it was twenty-one-eighty-one B.C., not twenty-one-ninety-one,” and he has that oh-so-kind, sympathetic look on his face.
Oh sure, Alex! Easy when you got them cue-cards in your hands!
But worse than that, don’t you think his job has become mundane at this point?
He’s almost robotic when it comes to his responses to correct answers:
“That’s the one!”
How many different ways can he acknowledge a correct response? He has about 10-12 responses, and he just mixes them up, over and over, throughout the show.
Alex Trebek has been hosting Jeopardy since 1984, so that’s almost 32 seasons.
The show is on Monday to Friday, assuming they do some re-runs, and take time for holidays and vacations, let’s call it 46 weeks per year, which is 230 episodes per year.
Each episode has 60 questions.
Maybe five questions per game go unanswered or incorrect by all participants?
So Alex is giving a “Yes!” or a “That’s it!” 55 times a day, 230 days a year, for 32 years.
That’s over 400,000 times he’s pretended to be excited about somebody getting a question right.
And you thought your job was the “same thing, over and over.”
So if we can break down the numbers for something as simple as Alex Trebek’s responses on Jeopardy, why don’t we try something more difficult, like answering how the heck Toronto’s real estate market continues to climb.
I don’t want to get into the big-picture thinking today. The increase in population, the city being historically undervalued, the city growing globally, the commerce in the city that isn’t linked to one industry like oil or fishing, etc…
Today, I want to look at one simple reason; something I’ve talked about so many times, that it must seem repetitive by this point.
But sometimes, the most complicated questions have the simplest answers.
It’s supply and demand, folks.
That’s it. It’s that simple.
As I’ve said before, the heat of Toronto’s housing market can be traced back to that “X” that your Grade-12 economics teacher put on the blackboard on the first day of the semester.
He put a “P” on one axis.
And he put a “Q” on the other.
He put an “S” on one of the lines, and he put a “D” on the other.
He pointed out the centre of that “X” and said that when the “S” line crosses the “D” line, you have equilibrium, and that this is when all things work out perfectly, for the buyers and sellers, the price and the quantity, the supply and the demand.
But few markets are in equilibrium.
If most of what we learned in school was theoretical, then this idea of “equilibrium” certainly takes the cake.
I don’t want to take this analysis too far and start talking about products with inelastic demand, and so on. So let’s just suggest that at the very basic level, when it comes to the real estate market, if there was more supply than demand, then prices would fall. If there was more demand than supply, then prices would rise.
And that very, very simple concept, is what is fueling the Toronto market.
So far in 2016, we’ve seen a dearth of listings, and that, combined with higher demand from buyers, is what is causing prices to rise.
But can we put numbers to this?
Is there quantifiable evidence to back this up, other than every real estate agent in every office throughout the city constantly looking at a colleague and saying “there’s nothing out there.”
Yes, there is.
Let’s look at the sales, and the listings, through the first four months of the year.
January of 2016 saw a decrease in active listings of 14.1% over January of 2015, and an increase in sales by 8.2%.
February of 2016 saw a decrease in active listings of 21.1% over February of 2015, and an increase in sales by 14.8%.
March of 2016 saw a decrease in active listings of 20.7% over March of 2015, and an increase in sales by 16.2%.
April of 2016 saw a decrease in active listings of 26.9% over April of 2015, and an increase in sales by 7.4%.
And there it is, folks.
The craziest number I think I have ever seen.
Active listings in April were down a whopping 26.9% over the same month last year, and that, almost by itself, tells the story of the 2016 Toronto real estate market.
It’s crazy to think that in all four of these months, listings are down, and sales are up.
So even though there is less for buyers to buy, more buyers are buying it.
And as your Grade-12 economics teacher would explain to you, prices are going to increase as a result!
The crazy thing is – it’s not like the decrease over 2015 was because 2015 was some crazy high-point.
In fact, the April 2015 number of active listings also decreased year-over-year, by 10.1% from in 2015 over 2014.
And believe it or not, April of 2014 saw an 8.4% decrease in active listings over April of 2013.
So for all the market bears out there, answer me this: how the hell are prices going to level off, let alone DROP, when supply is falling and demand is increasing?
I mean, honestly: 26.9%.
That’s no small measure.
We’re in the hottest real estate market on the planet, and more than one-quarter of the inventory we would expect based on last year, has vanished.
So, as for the impact on price, that’s another story, another number, and while not as large, it might have a bigger impact.
The average house price in April of 2016 increased by 16.2% overall April of 2015.
Not as big a number as 26.9%, but far more significant.
This isn’t to suggest, however that your $1,000,000 house is now worth $1,162,000. Or that your $400,000 condo is now worth $464,800 after a mere year of buying and holding.
It won’t directly translate into a 16.2% tax-free capital gain for everybody, but for some, it will. And for others, more.
Folks, I will admit that three years ago, I was starting to go from bullish, not quite to bearish, but somewhere in the middle. I wasn’t absorbing everything the bears were saying, but I was listening.
As things stand right now, with the demand where it is, unless we see supply levels not only increase to that of years’ past, but actually surpass them, we’re going to see double-digit increases into 2017, and then some.
I’m not making this market, but I sure as hell am not going to deny its existence.
Bears, by the time you can shout, “See, I was right!” you’ll have lost out on a tax-free capital gain that would take you the equivalent of ten or fifteen working years to get back.
I see no quantifiable reason left why this market is going to cool.
You just can’t argue with that 26.9%.