Everyday we are bombarded with information from a wide variety of sources. Some we have become accustom to ignoring, like advertising, and others we are told should be seen as authorities on facts about our world and how it effects us. News media is generally believed to be trustworthy and yet I keep hearing and reading fearmongering and out of context facts or at least without perspective.
I thoroughly agitated today while listening to the a news radio station today. They had a story on the
Toronto area real estate markets, or it could have been all of Ontario, and were questioning whether we were heading into "another bubble". They were talking about the increase sales of something around 70% "year over year for the month of December" and the huge increase in average sale price. The only thing I could think of is "Why are they not asking WHY" because if they did the numbers would not be nearly so surprising or indicative of a potential problem.
So what really happened? First of all "Year over Year", for December, just means the change for the month of December from 2008 to 2009 ( in this instance) and does not take into consideration any previous Decembers or whatever else has happened in any other month. Fortunately the Toronto area real estate markets are bigger than just one month per year and they affect and are affected by many different events and factors.
In this case the "news" station was not noting the simple fact that last December the real estate markets were very slow, due to a general perception of uncertainty and economic risk. There was an election in the States and the world economy was heading down rather quickly. This meant that fewer people were willing to commit to a large mortgage and fewer were willing to buy the very expensive homes. For freehold homes on the resale market only 125 out of 1692 homes sold, in December 2008, were sold for $700,000. That is only 7.39% were as in 2007 it was over 11%. This caused the Average price to drop dramatically, for which the news people were reporting a crash in prices, even though an individual home really only decreased in value by about 3%. This year the volume of sales is back up and at a historically hight level, with an increase of 19% over 2007 (for December on the Toronto Real Estate Board's MLS® system). However, that means that the increase in home sold, compared to December 2008, was 215% which would be alarming if it had not been for the drop in volume last year. Overall 2009 saw 87,308 homes sold in the Greater Toronto Area on the TREB MLS® system which was less then the number of sales in 2007.
As far as the average price, it increased by 14% over December 2008, but only 4.3% over December 2007. Horror of horrors that's just over a 2% per year increases when annualized. The reason for most of this increase in average sale price is the same reason why we had an inflated decrease in 2008, the composition of what is selling has changed again. Those $700,000 plus homes that were harder to sell in 2008 are selling again and account for 11.8% of the freehold resale real estate transactions.
There was also a statement that the markets are expected to cool down later this year and have smaller year over year increases. Well that's a no brainer. Seeing as the sales volumes were in a slump last year for the first 3 months it makes sense that as this market carries on stably the difference will decrease as we approach the months were last years sales were more normal and not affected by the uncertainty that people were feeling at the end of 2008 and early 2009.
They were commenting on how the HST is likely to cool down the real estate markets. This is very true about the new home markets as most new homes will cost an extra 8% due to the added tax. Especially for freehold homes that are less likely to be under the $400,000 price range where there are rebates available. On the resale side the HST only affects the the fees related to buying or selling and not the price of the home itself. For resale homes there may be an increase in value and demand as an 8% gap in prices between new and resale is instantly created on July 1st.
The facts are that the economy is doing fairly well, all things considering, our lending markets are fairly secure and interest rates are still very low and are likely to stay "historically low" for a while even if they do rise as the year goes on. Most importantly, there are a lot of people that want to buy homes, either upgrading, downsizing or buying their first home. We have not been in a "bubble" in this millennium, as the economics behind the real estate market (in the GTA) are still very sound with high demand and reasonable affordability. I really hope that there will be a resurgence in the "investigative" side of journalism very soon, people who ask "Why" before parroting statistics that they don't understand, solely to meet a deadline or cause panic.
The important thing to note is "Don't Panic" last years dip was entirely related to people putting their plans on hold because they were nervous. Now the prices are higher and likely to continue in that direction, preferably in a sustainable manner, and the best way to keep homes in your realm of affordability, if it is currently borderline, is to be in the market by owning. Not irresponsibly so, but that is were having the right agent comes into play, one that listens to your needs and helps you find the balance of what you need and want to keep your investment as safe as possible.
