Toronto Housing Market On The Verge Of Falling, Or Not?

Home sales in Toronto seem to be on the low lately. New data shows that home sales in Toronto is sharply declining.

According to the Canadian Real estate Association data on Thursday, the ratio of new listings downturn to 41 per cent in May. Which became the lowest percentage since 2008 and near the bottom of the range for what economist generally consider a balanced market.

“The gauge is a pretty good predictor of home prices and what it’s showing-based on the typical historical relationship between the two variables-is that a modest price decline is probably in the cards,” noted the Financial Post.

According to Bloomberg calculations, the 3-month moving average of the sales to new listings ratio explains almost 60 per cent of the variation in Toronto benchmark home prices five months later. A sustained ratio of 40 per cent implies small, single-digit annual prices declines in about half a year.

“Just a soft landing is the prevailing view of most economists, as well as the Bank of Canada. Home prices in the country’s financial capital after all have been climbing steadily for years, and the recent run of annual gains in excess of 30 per cent was bound to end. Even amid the sales decline in May, Toronto benchmark prices were up 1.2 per cent last month,” stated the Post.

“The soft landing predicted by the model however assumes a smooth and orderly correction, whereas Toronto housing dynamics seem out of control. Predictions based on historical relationships are less robust in more extreme situations.”

The Central Bank, in its semi-annual financial reviewed last week, stated that a sharp price correction in Toronto and Vancouver is unlikely because strong underlying fundamentals “support the idea that a downturn in prices would be limited.”

This week, Governor Stephen Poloz and his Senior Deputy Governor Carolyn Wilkins convulse markets by suggesting the economy may have firmed enough to brace a gradual withdrawal of stimulus. In effect, the policy makers are saying they’re comfortable enough with the situation in Toronto and Vancouver real estate to risk the potential fallout from the higher borrowing costs.