There’s a Canadian real estate correction? Apparently no one told Toronto. TRREB data shows home prices didn’t just climb in February, but made a 5-digit jump. Prospective buyers with their buyer-feet ice cold in the snow, stood puzzling and puzzling—asking, how can it be so? It came without rate cuts. It came without speculators. it came without cheap credit, stimulus, or foreign buyers… Sorry, but happy Dr. Seuss month! Now let’s talk numbers.
Greater Toronto Real Estate Prices Made A Big Jump Last Month
Greater Toronto real estate prices are once again climbing, and wasting no time. The TRREB benchmark home rose 1.1% (+$12,400) to $1,091,300 in February. A typical home is still down 17.7% (-$234,700) compared to the same month last year.
Greater Toronto Real Estate Prices Are Off The Peak
The composite benchmark price of a home across Greater Toronto.
Source: TRREB; Better Dwelling.
No, that wasn’t a typo. Monthly price growth suddenly changed course, with prices rising 5-digits. It was the first increase since rate hikes began in March 2022, and the largest since a month prior. A single month increase of this size is unusual during any period. But it’s especially difficult to grasp when the narrative is that buyers need more leverage.
Annual Growth Was Lower Due To A Base Effect
Despite the increase, the annual growth rate continued to slide to a new record low. It’s important to remember this measures the change in price over a 12-month period. Last year at this time, one of the largest monthly increases ever was observed. This created a base effect, where failing to rise as much as last year reduced the rate. The implication is a drop last month, but that wasn’t the case.
Greater Toronto Real Estate Price Growth Is Decelerating
The 12-month percent change for the composite benchmark price of a home across Greater Toronto.
Source: TRREB; Better Dwelling.
Higher Prices With Falling Demand & Rising Inventory
Higher prices? The first thing that comes to mind is that inventory must be drying up and sales increasing, right? Not this time. The sales to new listings ratio (SNLR) is the industry’s preferred measure for determining a buyer, seller, or balanced market. The TRREB SNLR fell to 46.6% in February, lower than last month and nearly 30 points below last year’s frenzy. It’s a technically balanced market, with demand slipping faster than new inventory.
Easing inventory pressures are reinforced by other major demand indicators. Active listings, the total remaining inventory, climbed 38.1% to 9,643 homes in February. At the same time, sales fell 47% to 4,783 units. Fewer sales and more inventory aren’t traditionally fuel for higher prices. That leaves a shift in buyer psychology as the culprit.
A Shift In Buyer Psychology Driven By The BoC
It’s impossible to nail down what caused the shift without asking every buyer. Even then, what a buyer says can differ greatly from their reasons. We know. Your neighbor bought a half-dozen pre-sale condos to help with supply, not speculation. That aside, two major factors are contributing—mortgage rates and the Bank of Canada (BoC).
Fixed-term mortgage rates were falling at the end of last year, and the start of this year. That was the read by many agents as a sign that the bottom is near, and many assume falling rates mean higher prices. There’s a lot of reason to believe that, since even BoC research indicates lower rates boost prices. Though every market crash includes falling rates that fail to stop a downturn.
Bond yields have been climbing aggressively, reinforcing higher fixed rate levels. However, mortgage pre-approvals typically last at least 60 days, preserving the pullback’s impact. In fact, it likely contributed pressure since buyers face the threat of re-securing a higher rate.
The BoC outright stating they were pausing rates due to debt was also a big factor. Many investors read this as the central bank not having the ability to raise rates further. In other words, this was as bad as it gets. After all, household debt is the limiting factor. Buyers essentially adopted a “too big to fail” mentality. Kind of like 2008, but replace the major banks with your Uber driver.
Credit markets changed drastically in February. Forecasts of the BoC being forced to hike due to importing inflation from a weak loonie are just one factor. A read based on the major releases in January changed significantly over the past month. Though a casual market participant isn’t tracking bond markets, and credit flows.
Does this mean the correction is over? Not exactly, it doesn’t indicate much in terms of market direction. One month doesn’t make a trend, and prices never move in a straight line. Most corrections also face a period where a group of consumers on the sideline jump in and call a bottom.
Sometimes they’re right, and call the bottom—like Toronto homebuyers in 1996. Other times they learn that academics refer to this as the “return to normal” phase of an asset bubble. If it’s the latter case, it’s often followed by an even sharper decline as the floor falls out from the market.