Saturday, May 9, 2009

April 2009: Recession? What Recession?

Looking at the charts for the Greater Toronto Area real estate market, it's hard to believe that we are in a recession.  Following a surprising strong March, the month of April followed suit.  Sales in the GTA reached 8,107 transactions (31.4% more than last month but 7.5% fewer than the same month last year), while the average price stood at $385,641 (6.5% more than last month but 3.3% less than the same month last year).  While buyers once again snapped up properties at close to or over asking in bidding wars, the mood this year is markedly different that prior years.  Conditions on offers during multiple offer situations are not frowned on as they were prior years. Nonetheless, as we will discuss with the charts to follow, more buyers are once again willing to put in unconditional offers, than the months following the collapse last fall.

Now to the charts...

The first chart is my favorite because it shows price in relation to sales.  The price-to-sales ratio give us a sense of whether prices are supported by the number of transactions, based on a historical view of the ratio.  The chart shows that during the past five years, the price-to-sales ratio has ranged between 40 and 80, more of less, oscillating with the seasons.   In December 2008, the ratio spiked up to 140, an indication that prices were not sustainable based on the level of sales, when compared to the prior five years.  Since then, the ratio has dropped back down to the more "normal" range.

A number of people have asked what the relevance is of this chart.  Some of them argue that inventory (the number of active properties currently on the market for sale) is what matters more.  Inventory reports do show the supply side of the supply-demand equation, but they do not give us an easy number to gauge whether prices are supported by underlying market conditions.  The demand side of the equation is similar - there are no reliable reports of the number of buyers on the market.  Any reports that do exist are based on surveys of a sample population (such as the surveys put out occasionally by the major real estate brokerages).  Such demand-side reports should be taken with a grain of salt.  The  price-to-sales ratio, on the other hand, gives us a good measure for the current health of the market, when compared to prior periods of time.

The next two charts show that the gap between conditional and firm sales have widen.  

Prudent buyers typically place conditions on offers to purchase so that the proper due diligence is achieved, such as getting approval from a lender for a mortgage or getting a satisfactory home inspection report or getting a termite inspection or ensuring insurance can be obtained at a reasonable cost, etc., etc.  However, in a hot market, in the face of competition from multiple offers, some buyers choose to forgo conditions in order to maximize their chances of being winning bet. (After a few unsuccesful attempts, the psychology of some buyers becomes that of winning at all costs, resulting in prices many thousands of dollars above the sellers' asking prices in addition to unconditional offers).

With the number of sales constant in a particular month, counting the number of transactions that were sold conditionally in the month and comparing it to the total number of firm transactions in the month, gives us a sense of whether buyers were, in general, more or less willing to put in offers on properties without conditions.

The gap between conditional and firm sales has once again widened in April 2009, after a brief severe narrowing in December 2008.  This means more buyers are once again willing to purchase properties without conditions.  Nonetheless, the gap is smaller than the past two years, meaning fewer buyers are willing to purchase properties unconditionally, on an a year-over-year basis.  This is a sign that the market is more of a buyers' market than prior years.  However, it is a weak buyers' market.  I would expect the gap to be negligible in a strong buyers' market, since I would expect buyers to put in offers with conditions even if they don't need the conditions, in order to maximize their bargaining power.  I suspect the gap will never be zero because some buyers would continue to use offers with no conditions whatsoever as a negotiating tactic to get better terms on price, closing date, etc.

The next two charts show the level of deals that have fallen through (i.e. transactions which were canceled due buyers backing away or unable to fulfill conditions, such as not being to get financing).  This lowered level is an indication of lessened buyer fear and an improved credit market.

The following chart shows that fewer listed properties are being delisted due to expiration, suspension or termination.  This has dropped markedly from last fall and winter.  This is an indication that fewer properties are sitting unsold.

The next chart is interesting.  It shows that the number of new power of sale listings that came on the MLS in the GTA, is at the highest point, comparing to the months of the past two years.  Having said that, the number of active power of sale listings as of May 9, 2009 stands at 322.  This is in stark contrast to last month's number of 4,293.  This is an indication that buyers are snapping up power of sale properties at an incredibly high rate.