Posted on: March 21, 2013

Summary

Activity in the housing market began to slow in the second half of 2012 and the trend has continued into the first two months of 2013. Expensive homes (over $1 million) and condominium sales have seen the most drastic volume declines. While home prices on average in the Greater Toronto Area continue to be higher from the prior year, this is being led by lower priced low-rise housing as townhomes have shown the best price performance year-to-date. There is a clear divergence happening in the GTA as an undersupply of low-rise housing leads to continued price appreciation while inventories of condominiums continue to rise.

Given the growth in housing since the 2008 market correction, we expect headline figures for the rest of the year to show declining activity. We entered the 2000’s with pent-up housing demand as a result of reduced construction in the late 1990’s, which has now largely been fulfilled and the market must adjust to longer-term growth being driven by new household formation.

With interest rates remaining at record low levels and employment in Ontario being stable, we expect the low rise housing market overall to show steady performance and prices to be flat for the year. The condo market, on the other hand, is expected to continue showing declines both in volumes and prices in 2013.

Greater Toronto Area Real Estate Market

Housing activity in the GTA market has slowed with a 15.4% year-over-year decline in February after experiencing a 1.3% decline in January. The main catalyst was a decline in sales of luxury homes, which dropped by over 30% vs the prior year. The stricter mortgage guidelines on CMHC insured mortgages for homes sold over one million dollars and the additional up front land transfer tax fees imposed by the City of Toronto were a driving force in these reductions.

Other sectors taking a hit were resale condo transactions which were down over 20% across the GTA as the average sale price dropped year-over-year by 2.5% in February to $331,597. This decline was primarily concentrated in the “416” region as the “905” regions experienced a 4% increase in prices. Overall, prices were up 2.1% across all home types with townhouses leading the way with a 6.7% increase.

Inventory numbers continue to show a very clear picture of the difference between condo and low-rise housing in the GTA. Supply in the low-rise market remains constrained, with less than 2.4 months of inventory, which is down from 3.2 months at the end of 2012. Condo inventories are hovering close to 4 months supply while the national inventory number is 6.8 months.

February Home Sales in the GTA by Major Home Type
 February Home Sales in the GTA by Major Home Type
Source: TREB
February Average Sale Prices in the GTA
 February Average Sale Prices in the GTA
Source: TREB
Months of Inventory Between Highrise & Lowrise Housing in GTA
 Months of Inventory Between Highrise & Lowrise Housing in GTA
Source: TREB

Ontario Real Estate Market Update

The Ontario housing market was a tale of two halves in 2012 as existing home sales trended lower during the last six months after peaking early on in the second quarter. As a result, total sales moved modestly lower on a year-over-year basis, but the 196,383 units sold still managed to remain above the recent ten year average. The slowdown in sales was broad based, with almost three quarters of major markets posting a decline during the year. Leading the declines were Hamilton which was down 6.4% and Kitchener down 4.9%. For 2013, sales are expected to stabilize during the first half of the year before recovering in the second half and into 2014. CMHC is forecasting sales of 191,300 units across Ontario for the year ahead which would represent a 2.6% decline from numbers recorded in 2012 and a 2.2% decline against the 10 year average.

Annual Home Sales in Ontario
 Annual Home Sales in Ontario
Source: CMHC

As fewer homes are expected to trade hands in Ontario during the first half of 2013, prices are also expected to stabilize. Balanced market conditions, lower volumes of expensive homes and tighter lending practices are expected to dampen any price appreciation. Resale prices which grew above the general rate of inflation in 2012 are forecasted to decline by 1% year-over-year to an average sale price of $382,200. Stronger price growth is expected in 2014 as a result of job & income growth and rising sales. The forecast for 2014 is for an average annual price of $390,000.

Average Annual Home Prices in Ontario
 Average Annual Home Prices in Ontario
Source: CMHC

Across Ontario, housing activity is expected to hold up better in northern and southwestern communities due to the support from the ongoing recovery in the U.S. and relatively less expensive housing. Larger southern Ontario housing markets will be held back by higher home prices, high apartment inventories and less investor demand. Construction of detached homes which has been on a downward trend since 2003 will remain stable after experiencing declines of 5.4% in 2012 and 2.5% in 2011. The decline is largely due to land constraints and demographic trends as an aging population and smaller households are less supportive of new detached construction and high home prices.

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