Wednesday, December 24, 2008

Power of Sales (Foreclosures) in Toronto Trending Up

In this entry, we'll have a look at the situation in "power of sale" listings in the Greater Toronto Area (GTA). While "foreclosure" is a term commonly used in the U.S., in Canada (at least in Ontario anyways), it is called "power of sale". A power of sale is the sale of a property by the lender, be it a bank, financial company or other individual.

The first chart below shows the number of monthly new contracts to list properties on the MLS as power of sale in the GTA. The numbers are counted by looking at seller names whereby the name contains either "bank" for "financial". For example, if Royal Bank lists a property as a power of sale, the seller name is listed as "Royal Bank".

Not exact science since the seller name(s) for some non-power-of-sale listings contain the word "bank", but it's good enough to give us a sense of where things are going. We can see from the chart that, though the situation isn't alarming quite yet, the trend in power of sales listings is slowly trending up for the past couple of years. It will be interesting to see how this chart takes shape in 2009.




The next two charts show the break down of power of sale listings by banks, for the period between January-November 2007 and the period between January-November 2008, respectively. We can see that Royal Bank has the highest proportion of the power of sale listings - not surprising since it is the largest bank in Canada. However what is interesting to note is that, in 2008, the proportion of power of sale listings for the other major banks increased.



The final chart shows the change in each bank's share of power of sale listings from 2007 to 2008 (January to November).

Sunday, December 21, 2008

Gap Between Firm Sales & Conditional Sales: Narrowing

Any prudent buyer would place the appropriate conditions on an offer to purchase a property, to ensure the appropriate due diligence has been taken. Typical conditions would include getting the appropriate morgage or a satisfactory inspection report on the property. In a slow market, buyers may even put a condition on the offer requiring the sale of their own property before firming up the purchase. (Many other conditions are in the buyer's arsenal, such as termite inspections, getting insurance, etc.).

In the past couple of years however, the market in the Greater Toronto Area has been so overheated that buyers have chosen to bypass conditions altogether in the face of competition from multiple offers. The offer goes straight from being just an offer to a firm sale once accepted by the seller.

An interesting trend to look at is the relation between the number of conditional sales to the number of firm sales.

In a strong sellers' market, one would expect the number of firm sales to be much greater than the number of conditional sales - an indication that buyers are forgoing conditions in order to win in a multiple offer situation.

In a strong buyers' market, one would expect the number of firm sales to be much fewer than the number of conditional sales - an indication that more buyers are putting conditions on offers and fewer buyers are going through with the purchase.



The charts above show the relationship between conditional sales and firm sales. The number of condition sales for each month are tallied from the first of the month to the last of the month, while the number of firm sales are tallied from the 7th of each month to the 7th of the next month.

Why?

The reason is that conditions typically run for five days, and I hear that realtors in Toronto normally don't update the status of the sale from conditional to firm immediately, either because the office is too busy or because they want the extra couple of days of free advertising. On sites like realtor.ca, a property is no longer searchable if it is sold firm. Since the rule is that brokerages must change the status within two days, two more days are added to the five days of a typical conditional period to get the firm sales number by querying from the 7th of the month to the 7th of the next month. This is not exact science since some conditions run for more than five days and some offices change the status earlier or later than two days, but it's better than counting from the first of the month as long as the same methodology is used for every month.

The first chart shows both the number of firm sales and the number of conditional sales. We can see from this chart that both lines track each other pretty well. However, the subtle thing to notice is the gap between the firm sales line and the conditional sales line.

The second chart shows the difference or gap between the firm sales and conditional sales numbers. We can see that there seems to be seasonality in the gap - that is, in the colder months the market seems to be more of a buyers' market (smaller gap; fewer unconditional offers) than the warmer months. We can also see that the gap is trending down for the past two years. Fewer and fewer buyers are willing to put unconditional offers.

What's surprising is that the gap is still positive even for the past couple of months, indicating that there are still more firm sales than conditional sales (i.e. there are still buyers who are placing unconditional offers). This tells me that the market is becoming a buyers' market but not quite there yet. In a full-blown buyers' market, I would expect the gap to go negative (i.e. only a portion of conditional sales go firm as few to no buyers would be crazy enough to place an unconditional offer on a property).

Saturday, December 20, 2008

Buyers Are Walking Away in Toronto


While the Toronto Real Estate Board provides an abundance of statistics, which they make available on their public website (www.torontorealestateboard.com), there are some numbers they don't publish for some reason.


So, with the help of my favourite broker to get the counts from the MLS system, I intend to track some of the numbers which in my view give important perspectives of the real estate market in Toronto.


In this entry I'll start with the "Deals Fallen Through" number. I hope to add others and possibly for other markets over time, if I can get the help to accurately produce them.


The "Deals Fallen Through" number indicates the number of buyers who have entered into an agreement of purchase and sale, but have for one reason or another decided to back out of the transaction, causing the deal to "fall through".


The first graph below shows the trend in the number of deals that have fallen through between November 2007 and November 2008. The second graph shows the number of deals that have fallen through as a percentage of sales. For December 2008, as of December 15, the number of deals that have fallen through is 69 and the same number as a percentage of sales 4.44%.