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Market Updates - Is the Market Cooling Down?

Last Wednesday, the Bank of Canada announced a rate hike of 25 basis points and that means its key interest rate went from 0.25% to 0.5%

Is that going to impact the housing market in any way?

If you have been reading some real estate news headlines over the past couple weeks, you might be confused at the contradicting headlines.

On one hand, a bunch of headlines are saying how buyer fatigue is cooling the housing market.

On the other hand, the official February market watch report from the real estate board is reporting a second highest February sales on record.

So what should you believe?

Is the market cooling or not?

It is true that the February numbers look even more crazy than January.

But it is also true that the market is cooling off a little bit.

And I’ll explain why.

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Let’s start with:

#1 The Official Numbers

Before we talk about the 2022 numbers, let’s take a look at the data in the whole year of 2021 and see if we can find any trends there.

Here’s the graph for the number of sales from January to December 2021.

As you can see, March was the busiest month of the year and sales started to slow down towards the end of the year.

Does the number of sales correlate with the price?

Let’s get the average price curve.

Prices shot way up at the beginning of the year.

Then they remained more or less stable till August.

Prices hiked again near the end of the year when sales were actually slowing down.

So what’s wrong here?

The problem with looking at the number of sales is that it doesn’t really tell us anything about the supply and demand.

Number of sales only reflects the demand side of things because it tells us how many units were sold in the month.

In order to understand the supply side of things, we need to look at the number of active listings because it tells us how many units still remain unsold at the end of the month.

So the ratio between the 2 numbers is going to tell us the market absorption rate.

Let me show you the graph here.

You see, when the ratio was around one, meaning supply was more or less enough to satisfy demand, prices remained fairly stable.

When the ratio went down at the beginning and near the end of the year, prices shot up because supply conditions were very tight.

The number of sales was low just because there was nothing to buy.

More demand, higher prices.

Now, let’s take a look at the 2022 numbers.

The active listing to sales ratio was at 0.73 for January and 0.77 for February.

So the market conditions were still very tight, with supply unable to meet demand and that’s why we have been seeing record high prices.

The average price for detached houses in the 416 area just went over the $2 million dollar mark, to $2.07 Million.

In the 905 area, it’s at $1.73 Million.

In terms of condos in the 416 area, the average price was $760,000 in January.

And it just went over the $800,000 mark to $822,000 in February.

In the 905 area, it’s at $756,000.

With these record numbers, that brings us to:

#2 What’s Cooling?

It’s really hard to relate those record numbers to a cooling market, isn’t it?

Here’s the thing.

Back in January, almost every property would attract multiple offers, let’s just say 10 offers.

But in the end, there could only be 1 winner.

And the remaining 9, would just be disappointed buyers.

Then the 9 of them went on to beat for another similar property.

Again, only 1 person could win and you still ended up with 8 disappointed buyers.

After being the disappointed one for numerous times, people felt frustrated and hopeless.

And they gave up, or at least take a break first.

Since mid-February, we started to see a shift in the market.

Instead of seeing 10 offers at offer presentation night, maybe it’s only down to 3 offers now.

But in the end, the seller is just going to pick 1 winner.

That will be 1 transaction counted towards the official numbers.

So when it comes to the official numbers, it doesn’t really matter whether there were 10 offers or 3 offers on the table, any competitions would still drive prices up.

But if you compare the February market with the January market, there’s definitely less competition.

Now that the first rate hike was announced, would the market continue to cool down?

#3 Interest Rates and Inflation Forecast

The Bank of Canada made some comments regarding inflation in its news release.

Price increases have become more pervasive, and measures of core inflation have all risen.

Poor harvest and higher transportation costs have pushed up food prices.

The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities.

All told, inflation is now expected to be higher in the near term than projected in January.

Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards.

So yes, we can expect more upcoming rate hikes to tame inflation.

But whether it’s possible to bring inflation down to the 2% target, I think it’s a big question mark.

Some economists are already warning that aggressive rate hikes will kill the economy.

By the way, if you haven’t watched the video on the relationship between interest rates and inflation and the basics of how an economy works, make sure you watch it at the link below afterwards.

So are the interest rate increases going to tamper the housing market?

I think that will discourage some people.

But here’s the key thing.

The Toronto housing market is backed by real demands.

Population growth is creating a real need for shelters.

Now that Covid restrictions are being lifted, we can expect to see an acceleration in immigration in the coming months and that should more than offset the people discouraged by higher interest rates.

And just to add onto what the Bank of Canada said…

The war in Ukraine is adding a new source of uncertainty in the market. Prices for oil and other commodities have risen sharply because of that.

The world continues to struggle with supply chain issues.

All that is going to drive inflation further up in the longer term.

You see, it’s because of all these uncertainties, it’s more important than ever to hold assets instead of cash.

And what’s better than having a real estate market that’s backed by real demand?

If you’re an end user trying to get into the market, it’s a good time now because there’s less competition.

Some people have stepped to the sidelines due to buyer fatigue.

Some are worried about the uncertainties.

I would expect prices to stay flat for a few months before they take off again.

If you’re an investor, the pre-construction market is an excellent investment vehicle now because you can just put down 20% and bypass all the current uncertainties.

Like I always say, the market goes up and down, up and down, but the long term trend is always up.

If you think you’re ready for the market, you can schedule a call with me at the link below.


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