PENT-UP DEMAND DROVE HOUSING SALES IN JULY
Toronto data shows spike in demand for larger dwellings, benefits of suburbs, write Murtaza Haider and Stephen Moranis
July sales data for large cities across Canada showed unprecedented resilience in housing markets. While the economy struggled with the pandemic-induced slowdown and with the unemployment rate still twice what it was just months ago, housing markets in Toronto and Vancouver posted much higher sales than those recorded in July of last year.
In Toronto, Canada’s largest housing market, 11,081 dwellings were sold, a 29.5 per cent increase in sales over July 2019. Sales (not seasonally adjusted) were up by almost 28 per cent from June 2020. Average housing prices in July climbed by over 17 per cent year-over-year.
In Vancouver, July housing sales were up by 22.3 per cent from the year before and up 28 per cent over June 2020. It was the best July in terms of overall sales in the past 10 years, and came with a noticeable increase in prices.
The surge in prices and sales is somewhat unexpected. The Canada Mortgage and Housing Corporation (CMHC) and some other experts were projecting declining sales and prices. The forecasts of a slow housing market might still ring true if the market runs out of steam in the fall or winter.
Two key trends may determine whether this indeed happens. The first is pent-up demand, which we believe is partially responsible for the recent strength in housing markets. Once that extra demand is exhausted, markets are likely to regress to the long-term average trends.
These are more readily apparent when analyzing year-to-date sales. Despite the strong July, total Toronto sales so far in 2020 still lag about 10 per cent behind the 52,417 recorded in the first seven months of 2019.
That leads one to conclude that the driving force behind the stronger sales in July this year is likely the forgone sales in April and May. Compared to almost 19,000 sales in April and May of 2019, fewer than 7,600 transactions were recorded in the greater Toronto area for the corresponding months in 2020.
Buyers entered the market this summer when lockdown restrictions were eased, resulting in an uncharacteristic jump in demand in July. The pent-up demand, however, was not matched with a commensurate increase in listings, which contributed to the rise in prices where buyers competed for a smaller inventory.
And there could be more to come. The effect of sales lag could continue into August and beyond, fuelled even further by a broader reopening of the economy and higher consumer confidence. However, an economic slowdown later in the year, and the job losses that might come with it, could adversely impact housing markets. Hence cautious optimism should guide the way.
The second noticeable trend is the flight to the suburbs. COVID-19 has contributed to a spike in demand for larger homes with backyards and balconies that are more readily available in the suburbs than in the urban core.
Housing transactions in Toronto’s 905 suburbs increased from 64 per cent of the total in
July 2019 to 68 per cent this year. While the increase does not suggest a pivotal shift, the preference for suburbs in Toronto should be considered a bellwether for other large housing markets in Canada.
Larger units were also in greater demand in July. Compared to last year, when detached units constituted 46 per cent of the transactions in greater Toronto, their share increased to 51 per cent last month. At the same time, the percentage of condominium sales in July 2020 declined by 18 per cent compared to July last year.
Contributing to the suburban appeal is the widening gap in housing prices between the suburbs and the core municipality in Toronto. Consider that in July 2019, the average price of detached dwellings in the
City of Toronto was 32 per cent higher than the same in the 905 suburbs. However, in July 2020, detached housing in the City of Toronto, on average, cost 45 per cent more than suburban dwellings.
COVID -19 and related restrictions have shifted consumer demand in time and space. Homebuyers and sellers can plan better by knowing that pent-up demand won’t last forever and that the higher prices of low-rise housing units in the urban core are likely to continue pushing homebuyers out to the suburbs.