Why sales and prices seem likely to continue to fall for at least the next two or three months

It’s official: after a long period of extraordinary home sales and home price growth, the Toronto Real Estate Board (TREB) reported that the Greater Toronto Area’s housing market posted the first set of this year’s declines in May for a market that’s been hot for at least the last two years. But will this be a one-month blip, or a turning point followed by falling prices and sales in the coming months?

Forecasting real estate market performance is a tricky business. But a closer look at the TREB data seems to provide enough support for a reasonable call: sales and prices will continue to fall for at least two or three more months.

In its news release, TREB states that home sales in May 2017 were 20.3 per cent lower than in the same month last year. This was a second month in a row of falling sales as in April 2017 sales dropped year-over-year by 3.2 per cent. Single-detached home sales fell 26.3 per cent in May, while condominium apartment sales were off 6.4 per cent.

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At the same time, the supply of new home listings kept on rising—up on a year-over-year basis by 33.6 per cent in April, and then a whopping 48.9 per cent in May.

As any student of economics 101 will tell you, when the supply is rising and the demand is declining, prices are bound to fall. Indeed, the average price of homes sold in the GTA dropped for the first time this year by 6.0 per cent in May compared to April.

Analysts who track the market often assume that the main reason for the change of trend in May was the set of measures intended to cool the GTA’s “overheated” housing market as announced by the Ontario government in April. However, a closer look at the TREB statistics suggests that the cooling-off trend started earlier. This is well illustrated by an under-recognized indicator which nevertheless is traditionally a good predictor of future sales and prices: the ratio of sales-to-new listings, i.e. the ratio of demand and supply for homes.

If the ratio—expressed as a per cent—is, say, 40 per cent, it simply means that in a given month there are 40 sales for every 100 new listings. Traditionally, a ratio in the 40 to 60 per cent range is considered a sign of a “balanced” market, while a ratio above 60 percent indicates a “sellers’” market. This ratio reached a record high of 81.5 per cent in the GTA in February 2017, a figure well above the balanced market threshold, and one that gave sellers a clear and strong advantage over buyers in the sale-negotiation process.

However, in the following months, the sales-to-new listings ratio has declined—first to 70.8 per cent in March, then to 53.8 per cent in April, and finally to 39.5 per cent in May. This represents a clear and steady downward trend that cannot be ignored. Even if this ratio starts to gradually rise in the coming summer months—which is far from likely, because buyers should remain skeptical for more than just one month—it will most probably remain within the “balanced” 40 to 60 per cent range. This suggests that, at least for the next few months, there will be a continued downward pressure on home prices.

Whether this pressure extends into the fall and becomes a prolonged trend is a crucial question for which we do not yet have a well-founded answer. But at least one thing is clear: the bidding wars in the GTA will stop, at least for the next few months. To paraphrase Alan Greenspan’s famous expression referring to the dot-com bubble of the late 1990s, the “irrational exuberance” of the Toronto home price growth is presently halted. This is good news for the Toronto real estate market. It is our best hope for a so-called soft landing, as opposed to a hard landing or “crash” of a clearly overheated Toronto housing market.

Novak Jankovic is an economist and consultant with over 20 years of experience in the housing markets and in mortgage finance.