Canadian real estate sales closed out 2017 with a bang. Numbers from the Canadian Real Estate Association (CREA) show sales climbed across the country in December. The increase in sales was a record for any single month, as FOMO driven buyers scrambled to buy before the new mortgage stress test went live.
Canadian Real Estate Sales Increased 5.74%
Canadian real estate sales had a substantial increase in December. CREA reported 45,976 sales across Canada in December, a 4.47% increase when compared to the month before. This represents a 5.74% increase compared to the same month last year. This is the highest we’ve seen sales in the country, for at least 10 years.
Source: CREA. Better Dwelling.
That’s 451% Higher Than Last Year’s Jump For December
A record setting December was only part of the story, as the monthly jump was also huge. The 4.47% increase from November to December is 451% higher than the same period the year before. This is also way higher than the median change over the past ten years, which is -0.04%. This is one of those unusual market moves that you’re going to want to watch closely. It could mean the market is picking up again… or it could just be a one off event.
It Was Probably FOMO Driven
Many Realtors are claiming the rush was due to buyers trying to “get in” before the new mortgage rules. New borrowing rules that went live in January 2018 introduced a stress test. This test, while it’s designed to ensure you can handle payments at a higher rate, also reduces your borrowing power by up to 20%. The Bank of Canada estimates over 81,000 mortgages issued last year, would not have passed the new stress test. Rather than adjusting expectations, many decided to just buy earlier.
Buyers accelerating their purchases before the rules change, will likely reduce January’s numbers. So don’t be too surprised if volume drops this month. After all, last month kind of borrowed some purchasing volume.
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Borrowed volume is a good observation. Sales in Toronto are slower than usual this month so far, and it makes sense that some of these buyers closed in December.
Great call, and much appreciated analysis. Some agents have been blaming the weather, which is ridiculous.
I want to agree with you but a few years ago down south the Federal Reserve blamed the weather for poor economic statistics. https://www.google.ca/amp/mobile.reuters.com/article/amp/idUSBREA1Q1J020140227
Good for them. They won’t be screwed with the reduced borrowing power, which is going to force everyone to compete for shoeboxes starting this year. Reducing borrowing power on people that provide such a substantial downpayment should not have been a priority.
Leaving the GTA or Vancouver is also a solution that should not be considered as being defeated, but rather as being intelligent. Coupled with generally increased cost of taxing and living, a move to the US or Syria should be considered. With these options you can benefit from Canada’s free health care and education subsidies while living elsewhere and paying taxes elsewhere. I love this country, but it is being eroded from the inside.
I detect a hint of sarcasm, but I agree that if you have no reason to be in a particular city, you should move. Toronto is nice, but if I wasn’t in banking and already a homeowner, I wouldn’t be here.
Many view moving as failure to “survive” a city, but there should be no shame in moving for a better life. A low sense of attachment to the place you live, will likely result in you earning more. Despite what the housing industry wants you to believe.
Lol “FOMO DRIVEN” This is one of the most biased blogs ever! Like I mentioned before, I just cannot wait to see what you smart folks here at better dwelling will say when the market picks up again. So far you blame FOMO. Well have you ever thought that if FOMO is a thing it could last years and years maybe even your lifetime and you’ll look back and say darn while I was renting like a fool for 30 years throwing my money out the window, my peers invested and purchased thier own home and now they are retired with rental income and a big nest egg of assets that’s even more scarce and valuable. You’ll look back and laugh at all the silly graphs you drew out to convince the world of nothing more than what you simply believe in and want everyone to believe in, that Toronto real estate market is garbage. You’re as bad as those realtors who spin everything in a positive way which is also wrong. I just wish there were a neutral news outlet about the GTA market I could read on. Cheers!
Seems foolish to me to tie up more than 50% of one’s wealth in one asset. I prefer renting and investing the savings in different markets/asset classes. Keeps my money liquid and growing at comparable rate to housing. You do need courage to weather the volatility though.
Many lenders gave approvals for mortgages that expired on December 31, which was shorter than the expiry they would normally give.
Some of my clients do have approvals that will apparently be honored beyond Jan 1, but that’s an exception, not a rule. The lender can still withdraw the terms. FOMO is actually a very accurate take.
I’m not sure what your hostility is towards media companies, but you can’t possibly believe that a double digit climb from one year to the next won’t be met with some sort of pull back.
Even Sotheby’s team (led by the former TREB president), wrote this in their predictions for Toronto:
“Residential properties *may* increase in price to due to low supply. It doesn’t mean sellers can be overconfident. There were plenty of properties that didn’t sell in the Fall due to ***over pricing*** and buyers are educated and cautious. Sellers have to prep their properties and have a strong pricing strategy in place. The stress tests will effect the market, but more likely those buyers with less equity and a tighter down payment.”
You’re doing a great disservice to your clients if you are pushing them right now. Not a single good Realtor in Toronto would push buyers right now, especially with the uncertainty surrounding B-20.
P.S. No one gives a shit what you think.
“If FOMO is a thing…” & “…it could last for years and year maybe even your lifetime…” & “…my peers invested…and now retired…” Tells me all I need to know. Oh kyle. I’m trying to be less of a prick.
Thanks for your comment Kyle.
“I was renting like a fool for 30 years throwing my money out the window, my peers invested and purchased thier own home and now they are retired with rental income and a big nest egg of assets that’s even more scarce and valuable.”
Is exactly why their hypothesis is most likely correct. People are worried this will be their last chance. How do you expect them to afford it if they didn’t buy the property before the Jan1?
Oh no, the Toronto Realty Blog commenters are expanding to Better Dwelling 🙁
The entry level market is still seeing lots of activity. Just yesterday, over 20 offers were submitted on the lowest priced 2 bedroom unit in Downtown Toronto. I haven’t heard what the final sale price is yet, but I would imagine it will be a record high for that unit layout in that particular building.
Yesterday, I posted a 1 bedroom condo with parking and a clear lake view for sale at $450K in the Fort York area and there was immediate interest. This was expected, hence why we have a set offer date for next week to allow time for all interested buyers to view it and do their due diligence before the offer date.
With uncertainty over exactly where prices will land, the prevalent strategy is going back to listing low and let the market (not Realtors, as so many BD readers like to believe) dictate the market value on the offer date. It is a strategy that has proven to work time and time again when market pricing is not clear.
Aside from the extremists (who think Realtors are conspiring against them), I think many critics of the real estate industry in Canada are more critical at the lack of transparency and rules that seem to protect Realtors more than the clients. It’s disingenuous to advertise that Realtor’s are acting as a trusted guide while at the same time preventing access to information and advocating for keeping rules that allow for conflicts of interest. Certainly there is a need for Realtors for guidance and expertise, but when an industry resists change to protect outdated selfish interests; your profession will end up in a Taxi’s vs. Uber situation in the near future.
Market pricing is a little more complicated after coming out of a “euphoric” stage. If you’ve been a Realtor less than 30 years, you haven’t experienced this in Canada before. If you have been a Realtor for 30 years, think back to how things were in 1991 – 1996.
I distinctly remember these days, when houses were being sold with “free” cars in the driveway, and condos came with vacations worth thousands of dollars.
Personally, I hope prices don’t correct too far. However, it’s naive to discount a correction as “appropriate pricing.” .
Thank you stacy. I appreciate you bringing some history/knowledge/Yoda to the conversation. We tend to only bring in the young bucks who only know making money hand over fist and don’t even understand the pain that is coming.
Vancouver Westside is headed for a price correction. Single Family Market is in for a rocky ride this year and probably next. There are 500 listings right now and about 10 sales. Lots of supply, few sales-reduced borrowing capacity by buyers = falling prices.
Thank you! Keep the honest real-time updates coming. I’m in Southern Ontario and Oakville was bleeding in October and is carrying into the new year. I get the impression a lot of agents recommended pulling and relisting in the spring or holding off entirely. We’ll see.
When there is a lot of negative media surrounding real estate, some people give in to panic selling. This was the case in November 2008-January 2009. Those who had the stomach to jump into buying mode made off with some great deals and subsequent gains. By February 2009, the first sign of a rebound started showing when houses were getting 2 or 3 offers at a time without a specific bid date. Effectively, those looking for a pull-back felt that 5-10% was enough to get into the market. By May-June 2009, that reduction was erased. In looking back at history, there has been rubber band effects after every correction. The fact
Fast forward to today and we have a much stronger global and domestic economy (hence the justification for higher interest rates today) and prices have pulled back from their April/May 2017 peaks. Many buyers are frozen in “wait and see” mode much like in early 2009, which means those who have the means and stomach to get into the market for freehold housing just might actually get what they want AND negotiate a fair price for it without the need to throw every cent they have at the seller.
As an aside, comparing to this time last year is going to call for doom and gloom. I think the media as a whole will paint a “sky is falling” picture for the next 4 months because they focus too much on year over year numbers and not on longer term trends or recognize when rebound effects are taking place until it is too late. If you read about it the news, then you have already missed the opportunity the current market presents itself.
Or, this is not like 2008-09 at all, but more like the 80-90’s, when the market started to go down, then went down, then went down even further, then continued to fall. Finally, it fell some more. And then kept falling, so it wasn’t yet ‘finally’ at all.
The 80s saw double-digit hyper-inflation, double digit mortgage rates and some pre-construction real estate was changing hands on multiple assignments like they were hot potatoes. What we see today is nothing like that environment.
What we have today:
2% inflation rate
3.x% interest rate
Nowadays an assignment can be done once IF allowed in the original agreement
Real demand via Millennials coming into their working years (did you know Millennials are a larger population than Boomers?)
Shortage of purpose built rental buildings (which is why investment properties are not the horrible phenomenon some would have you believe)
Strong desire for ownership vs. rental (values seemingly instilled into Canadians… by Boomers perhaps due to their success with real estate?)
The opportunity for a U.S. style correction was there in 2009, but it just didn’t happen. There were other factors keeping CDN real estate from tanking. I would even dare say that Trump helped us along at the start of 2017 with his political antics! If I was a foreigner looking to move to N.A., what would I have preferred? Canada, no question!
Hey, Al, don’t forget to throw in oil prices, the Vietnam War, Reganomics, the Space Shuttle, the jet stream, El Nino, and the cost of potatoes in Ireland.
Oh, and the butterfly flapping its wings.
And now to note the obvious that is not, however, apparently obvious.
If all these people are jumping in to avoid the new stress test, that implies they will not expect to pass it.
If they are not expected to pass a test that was put in place for their own protection, it would seem to me that they are all rushing like crazy to jump over the cliff before they put the fence up.
How many more rate increases like we had today before they realize they are no longer running, they are falling, because there is no ground under their feet?
Or were they running, not to beat the stress test, but to lock in a five year mortgage before the rates went up?
Maybe they COULD pass the stress test, they just didn’t WANT to.
Or they could pass the stress test at December’s rates, but they would fail it when the rates go higher?
The key issue that has bothered a lot of people about the stress test is that the +2% calculation assumes your mortgage amount would be the same today as it would at the end of a typical 5yr term. Let’s look at an entry level $500K purchase:
$100K (20%) downpayment
In December when people were trying to beat the stress test, a 5yr fixed I obtained for an investment property was at 3.04% from RBC, so we will use this figure even though sub 3% rates could have been obtained.
Based on the above, the monthly mortgage payment is $1901.20 (25yr amortization, monthly payments with no annual pre-payments).
The remaining principal amount at end of 5 years is $342,160.82 (slightly over half of your mortgage goes to principal repayment), assuming no lump sum prepayments were made.
Now applying the stress test at 2% higher rates in 5 years from December 2017, the mortgage renewal would have payments of $1,997.82. If the buyer cannot handle the additional $96.62/month, then they should be failing the stress test.
INSTEAD, the initial principal amount is used and the monthly payment used for the stress test is now $2,335.54 (17% higher than the proper 5yr re-finance calculation). You can see how the way the stress test was structured penalizes today’s buyer tremendously due to not factoring in any principal payment in their initial 5 year term.
I have been hearing from the buyers that we are working with that they feel they can easily afford more than the post-stress test amounts and don’t understand why the new pre-qualification numbers are so “unrealistically low”. This will push buyers to institutions who are not required to perform a stress test, thus leading to potentially sub-optimal mortgage terms paying more interest than they would have needed to just to qualify for the amount they know they can afford.
Sounds like a vicious trap, doesn’t it?
Making current decisions based on future assumptions based on previous performance. Wage increases have been going at the rate of inflation. If all of the wage increase goes to paying off the higher interest rate, something ELSE has to get cut back.
I think you forgot to consider your amortization will be 20 years after 5 at 25 have passed. This will put your payments closer to 2250/mo at the higher rate.
No, don’t you get it? You KEEP re-amortizing at 25 years, and NEVER pay off the mortgage. It’s how fuzzy logic works. It’s like increasing the amortization period to continue lowering the monthly payment. The stress test at the original amount today over 25 years gives $2326 monthly, just over the payment for the 20 year amortization at the new principle. Strange how math works. The higher rate now at 25 years equals almost the same monthly payments as the higher rate in five years at 20 year amortization.
If you stay with the same lender, then yes, you would be on a 20yr amortization. I didn’t mention that before. I couldn’t edit my post afterwards, so I should clarify that the scenario above is a worst case, if you were to re-finance with a 25yr amortization again to illustrate the difference in the payment.
This is what could happen if someone felt they couldn’t renew with the same institution under a 20yr amortization. It isn’t advisable to refinance again for 25yrs, since you end up paying way more interest, but in a pinch it is possible and far better of an option than being forced to sell. You can always re-calculate payments to a shorter amortization schedule later during your mortgage term, if funds are more available (as long as the lender’s terms allow for this).
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