Start of the Financial Market Collapse
The start of 2023 has been an interesting one. A lot of chaos and the first signs of Financial Market distress were in the news as we began to see the financial impact from the historically aggressive increases to the Federal Funds Rate. This all started with the recent collapsed of Silicon Valley Bank (SVB) which had over $212 billion in assets and took an enormous unhedged bet that interest rates would remain low by loading up on long-term bonds. When interest rates started increasing drastically from 0.25% (March 2022) to 5.0% March 2023, this put pressure on SVB’s bet. The SVB collapse was a classic case of an asset/liability duration mismatch and a rapidly rising interest rate. In hopes of getting better returns on investments, SVB put its assets in long-dated government bonds, where were supposed to be risk free. Its liabilities were demand deposits that start-ups could withdraw at any time. As the US Fed Reserve System began aggressively raising rates to fight inflation, the long-duration assets lost significant value whereas the liabilities hardly moved, as such, SVB was faced with more liabilities than assets. This was followed by small regional US bank First Republic and then 167 year Credit Suisse and could be the start of more to come. With the recent turmoil in the financial markets, the once hawkish Jerome Powell was less so as they decided to increase the Fed Rate by only 25bps vs 50bps.
MARKET SUMMARY February 2023
Bull Trap and Dead Cat Bounce
Now turning our attention to the Greater Toronto Area Real Estate Market. Since the last update reviewing the January 2023 market data, Bank of Canada made the decision to do a conditional pause to the overnight rate, which appears to have added fuel to the Now Spring Market. We started seeing changes to the current market and was evident in the February 2023 market statistics. This appears to have continued into March 2023 with early market data showing signs of a potential upward trend. Early signs of a Spring Market resurgence shows an increase in Multiple Offers, % of sales over-asking and reduction in Days on Market, with many homes selling within a couple of days on the market and more bully offers. Too early to see whether this will continue, but we are certainly seeing a change in the market. Not the crazy over-asking market we saw previously, but if homes are listed at market in high demand locations, these properties are seeing multiple offers and selling quickly. I have seen this with my own listings both on the resale and rental side. One thing is clear, there is growing demand and limited supply.
Many are using the trading term “Dead Cat Bounce” or “Bull Trap” to describe what we are currently seeing in the real estate market. A Dead Cat Bounce describes a falling stock having a rally that some believe is a return to a bull run or a trend towards higher prices, before it comes back down again. So the question is, are we experiencing a “Dead Cat Bounce” in the current real estate market? Hard to say, but we might have or appear to be near the bottom of the market. This ultimately will depend on whether Bank of Canada will continue to raise interest rates and what we will see when a large number of mortgages are due for renewal. One thing the February 2023 market data showed was the highest average sales price since June 2022.
Reviewing February 2023, we saw total sales of 4,783 which was more in line with sales during the 2022 summer/fall season with the total sales of approximately 4,000-5,000 between July to November period. Overall, sales dropped by 47% from February 2022 levels of 9,028 while New Listings also dropped by 41% from 14,153 to 8,367.
Current average sales price is $1,095,617 down 17.9% year over year, but up 5.5% month over month. From peak we are down ~17.8%, and in line with 2021 average price of $1,095,475.
Mortgage Interest Rates
The Bank of Canada on March 8, 2023 decided to hold the current overnight rate at 4.50% with current prime rate remaining at 6.70%. Next Bank of Canada Rate announcement will be on April 12, 2023.
Active Listings:
2013 = 18,324
2014 = 16,832
2015 = 15,219
2016 = 10,609 (+16% avg price)
2017 = 14,463
2018 = 17,138
2019 = 15,361
2020 = 12,677 (+11% avg price)
2021 = 8,845 (+20% avg price)
2022 = 11,810 (-15% avg price)
2023 Feb = 9,643 (down 32% from 10 year avg)
10 Year Avg = 14,128
Home Price and Sales
For the month of February, we saw sales drop by -47%, new listings decrease by -40.9% and Active Listings up by 38.1%, and still 2nd lowest in the past 10 years. Year over year average price dropped by -17.9%, with the detached market down -19.9%, Semi-detached -21.4%, townhomes -16.7% and condos down slightly by -11.8%.