Thursday, January 15, 2009

GTA Price-To-Sales Ratio: Straight From An Inconvenient Truth

In this entry, we'll examine the Price-To-Sales ratio between January 2005 to December 2008 for the Greater Toronto Area. The chart below is produced by taking the average price for a particular month and dividing by the total sales for that month. A small ratio indicates an active market and a large ration indicates a slow market.

During the boom years, we can see that, even as prices went up, sales kept pace to produce a chart that shows the fairly regular ups and downs in the ratio due to seasonality. The ratio has been largely range-bound between 40 in the hot months and 80 in the cold months, until December 2008, when it shot up to 140!

This is unsustainable and has to come back down to earth - either sales have to go back up or prices have to come down further or both. If the dismal sales figures for the past three months are any indication, my bet is that prices will have to come down further, a lot further. I believe to a lot of people, that is an inconvenient truth!



9 comments:

  1. You need to put larger graphs on your page or have linking to large images, they are too small and you can't read anything on them.

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  2. Great analysis! How does it look if you extend this back to the 80s?

    Oh ya, I agree with anonymous - could you make the graphs a little bigger for old eyes?

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  3. Thanks! Hmmm... used to be able to click on the chart to get a bigger version. I'll have to figure something out for the next entry. Thanks for pointing that out.

    As for going back to the 80s, I can do a yearly one (the monthly numbers I have doesn't go back that far, unfortunately).

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  4. What is the relevance of dividing an average home price by the unit sales? If home prices had dropped in half in December, than this chart would have showed that everything was okay? Wouldn't a sales to inventory ratio be more revealing?

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  5. Jonanthan,

    I would argue that this is relevant because it shows how unsustainable prices are currently given the low level of sales. Obviously, other contributing factors come into play (external stimuli - 0 down 40 yr amortization, interest rates; employment, income growth/decline, psychology, etc.), but hopefully this is one metric that shows how out of whack things look right now. Sellers not budging on price and buyers not opening up their wallets. Either the sellers are in denial or the buyers are. My bet is the sellers are.

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  6. Thanks for the article. Inventory is no doubt going through the roof and this will put downward pressure on prices if not contained. So far though, the market has not 'buckled' under the weight of all this inventory.

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  7. I would say the price would not go down fast. Image the house you have is the one you bought at a high price and you are still able to pay for the mortgage, most likely you will hold on. the only exception is that you are unable to hold on. so there is a fighting (bloody fighting) between seller and buyer. the wrestling is still on its very earlier stage.

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  8. Excellent data, I see the rationality behing price\sales ratio, but you have to always use it COMPARING with previous trend (reading 1 day by itself - has no meaning, but put that in the context of previous months, years, and you see the diaster coming). SELL NOW and loose 5% versus later in 2009 and loose 15% or more as you are taking a huge risk waiting

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