If anyone has been following the media headlines, the latest and best one is “Prices are dropping $2,100 per day”. That one is hilarious because I have worried clients, calling me and asking “what do I do?!”. For most people when they read headlines like that, they are imagining that $2,100 dollars are leaving their pockets each day, which could be half a month of net pay, and then the frenzied will freak out. Luckily, my university science degree taught me how to think critically and empirically (which is probably one of the only useful things from my university education). Anyways, my thinking when I read this headline is: How does one come to the conclusion that all houses are dropping $2,100 per day?
If you saw my video on the August 2017 market watch update, you’ll know that the average price overall in the GTA dropped by 6.39% from July to August 2017. This was a drastic drop, but if that is the number they are using to determine this $2,100 per day, then that means they are only looking at prices around $985,000. If you’re wondering how I ended up with that number, it is simply $2,100 x 30 / 6.39%. This is about $200K above the average sold price in August. However, when you think about how the average price is calculated (difference in total sales dollar amount divided by the number of homes transacted), you may realize that the numbers will be hugely skewed based on the type of homes that have been sold in July. Below is a table from the August market watch showing the month-to-month percentage changes for each area and for each product type.
If you would like the full spreadsheet, you can download it here: Download
I’m not going to get too math-nerdy on you, but I’ll outline three simple points that makes me question this headline.
New definition of entry-level. Remember how the new entry-level home is now a condo or a townhouse compared to 2 years ago when everyone was stretching themselves for a detached home in the ‘burbs? Well, when your new entry-level home is more than 50% less in price than your average detached home right now, that definitely reduces the average selling price by half already. Keep in mind, the starter homes are still selling in this market right now and they are selling at 100% of the listing price (especially in the downtown and affordable areas). I would even say there is a shortage of good properties out there for people who are just outright buying a home for the purpose of living in it.
Luxury Homes. Secondly, the numbers are hugely skewed because the massive $1.5 million detached houses are not selling. These are the luxury homes that your average Canadians cannot afford. When these sit on the market and aren’t sold, it also reduces the average sold home price since 1 of these luxury homes is equivalent to almost the cost of 3 entry-level condos. Remember, when things go sideways in the real estate market, the luxury homes will get hit first. Everyone needs a place to live and if they have to downsize because they over leverage themselves on the luxury home, that’s when it will hurt the most.
2016 Comparatives. Thirdly, you may have heard this before, but the summer months tend to be slow almost all the time. If you look at the chart above, under the orange headings, that outlines the percentage changes between July 2016 stats to August 2016 stats. Shockingly, despite how hot the market was last year, there was a drop in price and activity as well – that seems to get glanced over really quickly by the media. The prices in the 416 dropped even more last year during this time than the current year, with a drop of 12.35% vs 9.22%. What is going on?! You’ll notice that the 905 barely dropped in price last year, 1.34%, and that is because everyone was trying to buy a detached home in the ‘burbs last year.
I’m highlighting this information with the hopes of helping to shed more insight into the market and to allow you to more critically think about what you are actually reading in the headlines. I suggest that you take headlines with a grain of salt, as it always tends to showcase the doom and gloom of it all. Remember, the media makes money based on the number of eyeballs reading their content because that way, they can sell more ads; negative news will more likely than not grab more attention than the positive news. Which article would you rather read, “Prices drop $2,100 per day in Toronto in recent crash” or “Prices drop 5.14% in Toronto, similar to last year this time”?
This is not to tell you that the market isn’t in transition right now because it 100% is. I’m not in denial that the market has slowed down but I just hope that you understand it is not as slow as the media makes it seem. We are in transition right now and we will probably get a better sense of where the market is when the numbers come out in October, since September tends to trend upwards and be busier. This is why a lot of my savvy clients are currently picking up properties left, right and centre because it is so much easier to buy when there is less frenzy in the market.
As Warren Buffet says, “Be fearful when others are greedy and greedy when others are fearful”.
Until next time – Happy Real Estat-ing my friends,
Zhen
