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September home sales surge signals the real estate market is returning to equilibrium

September home sales surge signals the real estate market is returning to equilibrium

Housing markets in Toronto and Vancouver appear to be on the mend, as both gained strength over the summer and have posted a record increase in sales in the fall.

September housing sales in greater Vancouver increased by 46.3 per cent from the same month last year. A similar story emerged in greater Toronto where the September 2019 sales were 22 per cent higher than the sales recorded a year earlier.

While sales in September were up in both Toronto and Vancouver, housing prices presented a different picture. The MLS composite home price index, which captures the price of a typical dwelling over time, was up by 5.2 per cent on an annual basis in Toronto. In comparison, the index was down by 7.3 per cent in Vancouver.

While the industry has greeted the rebound with relief, the question of why sales are bouncing back now is unclear.

Some experts believe that low mortgage rates have been a factor. Also, buyers previously deterred by the stress tests might “have adjusted to the guideline in terms of the type and location of purchase, purchase price and down payment amount,” according to Jason Mercer, chief market analyst for the Toronto Real Estate Board.

Others believe that shared equity mortgages (SEM) might have contributed to the increase in sales. SEMs, which became effective in September, provide up to 10 per cent of the purchase price to a first-time homebuyer in exchange for an equity stake in the property. Proponents believe that SEMs help reduce monthly mortgage payments, which may induce housing demand by first-time homebuyers.

While the theory seems plausible, we believe SEMs are an unlikely catalyst. SEMs come with certain conditions. For one, the qualifying properties must be priced under $500,000 — a category that actually saw a five per cent decline in sales in Toronto on a year-over-year basis.

The more substantial increase in sales was observed for rather expensive properties in Toronto. September 2019 sales of homes priced between $1.25 and $1.75 million increased by more than 50 per cent on an annual basis, while those of homes priced between $900,000 and $1.25 million jumped by more than 40 per cent.

Tsur Somerville, a professor of real estate finance at the University of British Columbia, noted an uptick in sales over the summer. Houses in Vancouver’s high-demand neighbourhoods were “moving very quickly,” he noted.

Somerville pointed out that the last month’s jump in sales in Vancouver comes following a down period in September 2018, when sales relative to the year before had collapsed by 43.5 per cent. The Vancouver market, in other words, is trying to regain what it had lost over the past couple of years.

What is interesting about the sudden resurgence in sales in both Toronto and Vancouver is that it occurred during a period of strong “underlying economic fundamentals that have not changed much,” Somerville said.

Some experts believe that the converging prices of semi-detached units, condominium apartments, and townhouses in cities such as Toronto are indicative of markets approaching an equilibrium. Benjamin Tal, the deputy chief economist with CIBC World Markets, believes that the correction in low-rise housing is finally over. The pent-up demand in Toronto has brought the buyers from the sidelines resulting in an acceleration in sales and prices.

Housing markets have arrived back at a point “where we should have been,” said Tal.

The evidence that markets are returning to their long-term equilibrium is indeed getting stronger. September 2019 sales in Toronto, at 7,825 units, are similar to the sales recorded in September 2014 and 2015. At the same time, housing prices in Toronto, despite the earlier decline in sales volume, have been resilient over the past five years.

Like other economists, Tal also believes that declining interest rates have helped the recovery in housing markets. However, he cautions the markets to be prepared for an interest rate hike in 2020 or soon afterwards.

Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.

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