National Post (National Edition)
Housing sales volume and prices marching to different tunes
April sales data from some of Canada’s large markets confirm fears that housing sales are continuing to dramatically decline, but while volumes have plummeted, prices are more stable or even rising in some sub-markets.
The dichotomy in sales volumes and prices reveals an inherent characteristic of housing prices: they are sticky. Like wages, which do not decline as much during a recession as employment numbers do, housing prices have a way of sustaining themselves in short-lasting economic crises. However, all bets are off if a crisis lasts for a more extended period and has sustained job losses.
A detailed look at various sub-markets suggests that housing prices and sales in the central parts of cities might experience more significant declines. The reason could be that centrally located areas, praised for their accessibility and high walk scores, are frothier when prices are rising faster than the rest of the local housing market.
Housing sales data for the Toronto region in April reported a 67 per cent decline in year-over-year sales, and new listings were down 64 per cent. But the average price was essentially unchanged, with a slight upward tick of 0.1 per cent.
Remember, average prices do not account for the differences in structural type and size of housing over time. For example, average prices dropped for detached housing and condominiums in Toronto, but not for semi-detached units and townhouses.
A comparison between Toronto and its 905 suburbs is even more revealing. Average year-over-year prices dropped by only 0.8 per cent for detached housing in the suburbs, but prices were slightly higher for other suburban housing types.
Within the city, average prices dropped by 9.4 per cent in the central, more expensive parts, but increased in the eastern and western neighbourhoods. Indeed, prices rose by 8.8 per cent in the eastern parts.
Keep in mind that extraordinarily high and low values skew unadjusted average prices. Median prices, to some extent, adjust for those extremes. Median prices in most districts comprising the City of Toronto were higher in April than a year earlier. Even in the central areas, median prices were slightly up by 0.86 per cent.
The Toronto Real Estate Board publishes indexed benchmarked prices to adjust for the quality and size of housing, which facilitate a comparison of similar units in size over time. Benchmarked yearover-year prices in the Toronto region (including all sub-markets and all types of housing) were up 10.2 per cent.
A nuanced picture of the real estate markets emerges when we put all these numbers together. Unadjusted average prices suggest that housing in the city’s core is experiencing a slight decline. But when adjusted for size and quality, the average price rose in April compared to a year ago.
This leads to two critical questions. First, why are housing prices climbing when sales are down so drastically? Second, will prices rise or decline in the future?
Skylar Olsen, senior principal economist at Zillow Group, has an explanation for the gravity-defying housing prices. He said that even though housing demand had collapsed, so did the supply, which helps sustain prices at their current levels. Also, many sellers are not motivated yet to cut prices. They believe that once the lockdown-related restrictions are over, buyers will be out in droves to chase housing sales that, because of the decline in listings, will be in short supply.
The question about future housing prices is harder to answer. Some believe pent-up demand will likely push prices upwards when markets resume regular activity. For example, the Federal National Mortgage Association, better known as Fannie Mae, a U.S. government-sponsored enterprise specializing in mortgage securitization, expects median housing prices to be slightly higher in 2020 than last year.
But CIBC Capital Markets economists in a recent note forecasted a decline in average prices of five to 10 per cent in Canada from 2019 levels. The weakness in labour markets is cited as one reason for the decline, “with highcost units in the highrise segment of the market seeing the most notable price declines.” And Canada Mortgage and Housing Corp. predicts housing prices will not return to pre-COVID-19 levels until late 2022.
Yogi Berra once proclaimed that “it’s tough to make predictions, especially about the future.” Housing market forecasts are no different. They are driven by assumptions made by forecasters.
If governments and businesses join hands to relaunch the economy sooner to prevent layoffs from becoming permanent, housing markets will rebound sooner. Both national and lower levels of governments in North America and Europe are hinting at opening retail, schools and more.
An economic relaunch in the presence of the pandemic is a likely scenario and one that may also hold some promise for housing markets. This may allow for a resurgence in sales and housing prices to moderately appreciate.