Greater Toronto real estate’s inventory squeeze appears to be rapidly coming to an end. The sales to new listings ratio (SNLR) made a very sharp decline in April, marking the third month in a row. Such sharp corrections in the SNLR are historically associated with falling price growth. Over just the past 3 months, the decline now ranks as one of the fastest seen in decades.
Sales To New Listings Ratio (SNLR)
The sales to new listings ratio (SNLR) is one tool used to figure out how quickly inventory is being absorbed. Higher ratios mean the market is accepting the inventory at the prices very quickly. Lower ratios mean buyers aren’t quite as keen on the inventory being offered at the prices. High ratios mean a tighter market with fewer choices. Low ratios mean a more loose market, with more options. But what’s high and low?
There are some generally accepted industry standards that are thrown around. Markets with an SNLR above 60% are called sellers’ markets, where prices tend to rise. When the SNLR falls below 40%, prices are expected to fall. Between 40% and 60%, and the market is considered balanced, and priced right for demand. Of course, the reality isn’t quite that neat, now is it?
Some regions will always have higher ratios, with balanced being in the higher range. For example, Toronto’s 2018 price drops occurred without the ratio ever falling below 40%. That’s because the shift in expectations is often enough. Sales fall faster than inventory can adjust, if enough buyers reject it. That lowers the ratio, sometimes causing new listings to list at a lower price. For historical context, Toronto has only been under 40% for four months in the past 20 years.
Toronto Real Estate Has Seen The SNLR Fall Nearly 20 Points
Greater Toronto real estate is seeing the SNLR fall faster than it saw it increase. The ratio fell to 66.10% in April, down a seasonally adjusted 6.56% from the previous month. The ratio peaked at 86.06% in January, and has now fallen 19.96 points since then. Back in January, it was the highest ratio in exactly 19 years. This marks one of the fastest declines, and ramp-ups, in the history of Toronto’s market.
Greater Toronto Sales To New Listings RatioThe annual percent change for the benchmark price vs the seasonally adjusted sales to new listings ratio (SNLR). Source: TRREB; Better Dwelling.
Toronto Real Estate Usually Sees Home Prices Drop After The SNLR
In over 16 years of benchmark price data, there have only been three 20 point drops in SNLR — 2007, 2009, and 2017. After peaking in July 2017 and September 2009, price growth began to fall 6 months afterward. In January 2017, it took 3 months for price growth to decelerate after the SNLR peak. Worth a mention is the first two drops in SNLR were more gradual compared to the 2017 one. The drop in 2017 more closely resembles the current decline in SNLR — although they’re happening for very different reasons.
Renewing demand after such a large pull forward would require a substantial injection of capital into the market. It can’t be discounted, especially since the federal government outright said a price drop is unacceptable. However, right now the market is looking towards a much needed cooling. Earlier this month, BMO also said they believe the market “bubble is cresting” (peaking), and separately cited the SNLR as a primary reason the market is past peak momentum.
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