The end of the rebound: Covid Weekly York Region Real Estate Market Update - May 2
Monday May 04th, 2020
The volume metrics I was optimistic about have regressed pretty substantially. Even more surprising is that price seems to show some surprising resilience against the volume challenges in the market right now. I think this is a good thing, but I'm reluctant to give it too much credit right now as it seems to be evolving as a selection bias.
Selection Bias in York Region House Price Growth
The easiest way to visualize this is by evaluating the price rebound we've seen is to try to unpack any selection bias we've seen in the data. I wrote more about the impact of selection bias on seasonal pricing in this article.
Volume decline seems to be more apparent within the price-floor market. Naturally, this creates the appearance as price growth because fewer less expensive homes are transacting, skewing the average and median prices up, which you can see below. I don't really like using this weekly price analysis because it's too micro, creating volatility in the data that kind of distracts from the point. This is probably the last time I'll use this chart:
Sales and listing volume of York Region properties
Last week, I was feeling pretty optimistic that we found an equilibrium in the short-term, but most of the metrics I was using reverted completely. It seems we could see a little more volatility if the current supply growth trend continues. It appeared that new listing volume had adapted to the declining sales volume and functionally postponed the spring market. Last week, we saw an increase in sales, but a decrease in listings. This week, the oppostie was true:
I do think this short-term supply imbalance could help eliminate the threat of a supply flood in the future, which is probably the greatest microeconomic price risk we need to worry about. The consequence is that this imbalance could create discounting in the short-term.
The clearest way to visualize this trend on a week-to-week basis is by looking at the sales-to-new-listings ratio (above), which is back to a declining trend after a strong rebound last week. If this trend perpetuates for just a little longer, we could end up in an excess supply scenario, which typically leads to further discounting on price. Our market has traditionally been one with excess demand due to a variety of macro factors, leading consistent price growth in real estate in the Greater Toronto Area.
York Region real estate price metrics:
I usually like to evaluate sale-to-list-price (SL) ratio because it functions like a bid-ask table on real estate. Given this assumption, it should allude to the direction price is heading the way a stock market bid-ask spread would:
Last week, we saw things rebound back to 98% from a historically low 97%. This gave me a bit of optimism because when we reached 98% for the first time a month ago, I had felt that falling to a 96% average bid price would be cause for concern, since it was 10% lower than the 106% peak we saw in March. Now, we've regressed against the growth, and are back down to 97%. Combining this declining bid environment with increasing supply leads me to believe we could see some short-term pain on price. That being said, I actually think this short-term pain is a healthy opportunity cost. It could protect us from faster-paced decline in the future, given that we don't know what the supply & demand metrics are going to look like after lockdown.
GTA real estate absorption is slowing again, as well:
Last week, the number of days on market rebounded quite nicely, and made me feel pretty positive about how the volume side of things. This week, property absorption in York Region returned to its slowing trend, causing me to believe this equilibrium is running out of steam.
Each week that we have more listings than sales, we need a week with more sales than listings to make up for it. As supply begins to stack up in the market, the requirement for a demand flood, or "pent-up demand" scenario, becomes more necessary in order to get to the same place we were pre-covid. When I think about consumer psychology of buying right now, it makes me feel like that won't happen.
Trying to make sense of consumer sentiment in GTA real estate:
This actually keeps me up at night. If supply is outpacing demand during a health crisis, this should tell us that more people need to sell than need to buy. Compounding that, I think about this weird set of psychological decisions that would go into buying or selling right now.
Both buyers and sellers are behaving as though they believe prices will decline.
Hear me out here:
- Supply is outpacing demand during lockdown. Assuming those transacting right now are ones who need to... does this merely tell us that more people need to sell? I feel like the truth may be more than that.
- Thinking only about the health risk - a seller assumes more covid risk than a buyer. They have more strangers in their house, and have no way to know how those strangers are interacting with the home i.e. touching, breathing, etc.
- Buyers can control the way they mitigate health risk of viewing a property through their behaviour, so, technically, they have less risk. We have excess supply right now, historically low SL ratio, and financial institutions claiming that prices will grow by end of year, wouldn't buyers look to buy without competition if they believed that was the case?
- If the answer to that question is no, then why are buyers waiting? Has residential credit stifled demand? What I'm hearing from the lending space tells me no. So then... does this tell us that buyers think prices won't increase? Is there something I'm missing here?
- If buyers think that prices won't increase, assume that sellers have the same sentiment just for argument's sake... does this tell us that sellers who are listing during lockdown are doing so to mitigate future exposure to price decline?