Toronto Real Estate Sets A New Record Low For Mortgage Delinquencies

Toronto real estate’s soaring prices helped set a new record low for mortgage delinquencies. Numbers from Equifax Canada show that fewer and fewer people are falling behind on their mortgage payments in the city. While it sounds like a good thing, the rate at which it declined is highly indicative that the city has reached a real estate bubble.

Toronto Mortgage Delinquencies Fall To A Low

Mortgage delinquencies fell to a new low in the City of Toronto. The rate at the end of the fourth quarter of 2016 stood at 0.12% of all mortgages, a 20% decline from the year before. This represents a massive 50% decline from 2012 Q3, as far back as publically available for the city. This probably sounds like gibberish to most, so let’s give it some context.

Toronto Mortgage Delinquencies Vs. Ontario and Canada

We recently observed that the province of Ontario fell to pre-crash levels of 1990. Only 0.11% of mortgages in Ontario showed delinquencies, a 50% decline over the same period as Toronto. Canada has a rate of 0.34% of mortgages in delinquency, an 8.8% decline over the same period. Toronto, and Ontario’s rate declined more than 5 times faster, which is much harder to sustain.

Mortgage Delinquencies, Incomes, and Real Estate Bubbles

Declining delinquencies are great… for banks. It’s generally not the great indicator most people think it is for the market however. When rates decline this quickly, you should be looking for one of two things – rapidly accelerating incomes, or bubble amounts of liquidity in the real estate market.

Mortgage delinquencies will drop as incomes rise. In this case, the price of housing is easily absorbed by the gains made in household incomes. This is common in a booming economy, because incomes are growing faster than expenses. People can save, put more away for a rainy day, and find a new (well paying) job quickly. The rate of delinquency drops in this case, but not very rapidly. For example, Canada saw delinquencies dropped 37% from 1998 to 2001, when the tech bubble sent the stock market (and incomes) soaring.

Mortgage delinquencies will also drop in a real estate bubble. People have been saying Toronto is in a real estate bubble for years, but most of it looked like fairly sustainable growth until 2016 in my opinion. This is when people started waiving inspections, paying huge amounts above ask, and absorbed everything on the market in just a few days. These aren’t things rational buyers do, these are things frenzied buyers do.

Toronto New Construction Prices See The Worst July Since 1993

New construction prices are dropping fast. Numbers from the Canada Housing and Mortgage Corporation (CMHC) show that new construction sale prices in Toronto have declined by various measures. Interesting enough, sales in July 2017 haven’t actually slowed down.

Median Price of New Construction In Toronto Declines Over 20%

The median price of new homes and condominiums sold has had a massive drop in Toronto. The median price fell to $675,000, a 20.59% decline from the month before. This also represents a 12.34% decline from the same month last year, the largest annual decline for a July since 1993. This brings the median price back down to January 2016 levels.

Average Price of New Construction In Toronto Declines 17.3%

The average price for new construction sales are also falling across Toronto. The average sale price fell to $862,878, a 17.3% decline from the month before. This also represents a 29.9% decline from the same month last year. Average prices aren’t great for determining sale prices, but they are useful for determining where dollar volume is concentrating (i.e. people are upgrading or first-time buyers are running the market).

Sales of New Construction Are Flat From Last Month

One of the most interesting numbers was the number of new construction sales, which were actually up… a lot. July 2017 saw 1,208 sales, basically flat from the month before. This is still a huge jump of 75% from the same month last year. The number of units sold in June and July 2017 are actually at a high not seen since November 2013, when 1,233 units were sold.

The sales numbers actually put these declining prices into perspective. Lower prices and higher sales is somewhat paradoxical to traditional supply and demand economics. Afterall, if you’re selling more units, why discount them at all? This means one of two things in my opinion, less affluent buyers are making the majority of new construction purchases right now, or they’re being sold to investors.

Less affluent buyers, like first-time buyers, are usually the last large group of real estate buyers in an uncertain market. Those that are well heeled don’t necessarily feel the need to chase the market, so they’ll take a pause when things are too expensive (i.e. the flood of high-level bank executives that sold their homes last year). First-time buyers worry that this is their last chance to get into the market, so they tend to hit the market whether they’re ready or not. This leads to a flood of lower priced units flying off the shelf.

The other possibility is a shift to investor grade units. Not the kind of “investor” that leaves them empty and treats them like gold bars, like in Vancouver. The kind of investor that has the intention of becoming a landlord, looking for a smaller place to rent to new tenants. With overseas marketing ramping up, boasting of units with guaranteed cap rates, this is a very real possibility. Anecdotally, Toronto realtors have also been telling us that Boomers are looking for investment condos, to keep cash flow coming in through retirement.

The decline in new construction prices while sales are ramping up is slightly confusing. The takeaway is that high-end and mid-ranged buyers aren’t demonstrating significant demand. We’ll have to wait and see if more affluent buyers have paused because they believe recent policy changes will drop real estate prices, or if the Toronto housing market has lost a little steam.

Canadian Real Estate Prices See Largest Single Month Decline Since 2008

Canadian real estate prices made the largest single-month decline in years. The Canadian Real Estate Association (CREA) numbers show that the price of homes are falling across the country. While it’s too early to call it a trend, it’s definitely something worth noting if you’re looking for a home, or you’re in the industry.

Composite Prices Drop 1.52% From Last Month

Prices showed the largest drop in over almost a decade. The July composite benchmark, which is the price of a “typical” home across the country, fell to $607,100. The $9,400 drop last month is a 1.52% decline, the largest single month decline since the 1.66% drop seen in December 2008. This brings prices back to April 2017 levels, which wasn’t all that long ago really. The more important trend to watch is price growth deceleration.

Sharp Deceleration of Growth

Canadian real estate prices are still higher than last year, but the rate of growth is tapering fast. The $607,100 composite price in July 2017, is 12.86% higher than the same month last year. Peak growth on the 12 month cycle was observed in April 2017, when prices were 19.7% higher than the same month, one year before. The drop brings us back to May 2016 levels of price growth. While a gain of over 12% is nothing to sneeze at, deceleration of price growth is something you’re going to want to keep an eye on if you’re buying as an investment.

Is This The Crash?

Nope….at least not yet at least. A crash requires a significant decline in benchmark prices, and we’re only at a 1.5% decline from the all-time high. This a relatively minor drop in contrast to the gains homes made over the past couple of years. However, it is still the largest drop in almost a decade, which is far from normal.

This is only the second month in a row where prices have declined, so it’s too early to call it a trend. It’s also pretty unlikely that the largest drop in 103 months would be followed by a gain in my opinion, but I guess stranger things have happened.