Hey, how are you?
Did you just stumble upon this blog for the first time? You were Googling “The Road Ahead,” looking for the 1995 book by Bill Gates, of the same title?
Well, now you found this blog!
But not to worry, I have a story to tell about that book anyways…
I actually read this book, if you can believe it or not. I was in high school and I suppose that instead of going to parties and talking to girls, I figured I’d curl up with a hardcover and learn about the “information super highway!”
Really, I just wanted the book because it came with something called a “CD ROM.”
They actually put a sticker on the front of the book advertising this:
The crazy thing is: my computer didn’t have a CD-ROM drive.
But I wanted the disc anyways.
Bill Gates, among others, has always impressed me with his ability to see the future.
I remember reading an interview with him once where he said, “In the future, you’ll come home and you won’t have to pick what to view; your television will already know what you want to watch.”
I thought to myself, “Now, here’s a guy that’s just showing off. That’s such an asinine thing to say. That will never happen.”
But I also collected DVD’s in the mid-2000’s. I had several hundred of them.
Now, here we are, and my DVD’s are obsolete because we stream everything, and yes, Netflix has an algorithm that tracks what you watch and can make recommendations for you on shows and movies that would enjoy.
Bill Gates: 1, David Fleming: 0.
Predicting the future is hard!
Just ask Robert Zemeckis and Bob Gale.
They must be absolutely mortified and embarrassed beyond belief that, in 2022, we don’t have any of these:
Flying cars and hoverboards aside, not everybody is in a position to look into the future with any guarantee of accuracy.
The same can be said as we meet here on TRB today with the first-half of 2022 in the rear-view mirror, trying to look at the road ahead in our Toronto real estate market.
The calendar has turned to July; I can’t believe it folks! It seems like just yesterday we were shoveling driveways full of snow and getting over our Christmas hangovers.
Canada Day has also passed us by, and before we know it, we’ll be planning for back-to-school in September. Although, if you’re like my wife, you’ll say, “Stop looking so far ahead, just enjoy the moment!”
Having said that, the fall real estate market is just around the corner, the summer market is taking shape, and both of these markets will likely help determine what 2023 will look like.
So, let’s look at a handful of factors that I think will help us to predict the road ahead…
1) June TRREB Stats
By the time you’re reading this blog on Monday, the June TRREB stats might be released. If you’re an insider, you’ll probably have them. So as I write this post, on Saturday afternoon, I don’t know exactly what the figures will say, but I do know what to look for.
There are three stats that I’ll interested in: average GTA price, total sales, new listings.
Sure, I’m interested in supply and demand, plus the intersection therein, aka price. What else is there to look at, right?
But while we can use numbers to say anything we want after the fact, by looking at price, sales, active listings, new listings, days on market, absorption rate, month-over-month, year-over-year, et al, today, I want to look at May specifcally to see if June follows suit.
Here’s how the GTA average sale price looks through May:
When the January figures were released, it was one of those “where were you when” moments. I predicted we might see the figure top $1,200,000, but who thought we’d see another 4% on top?
February’s figure was mind-blowing. A 7.4% increase, month-over-month, after a 7.3% increase.
And then came the decline, although the $1,299,984 figure in March was nothing to sneeze at; a rounding error, from $1,334,554, if you will.
But since then, we all know that prices have declined, and it’s been led by a massive drop in prices in the regions outside the GTA.
So what’s in store for June?
I have to think we see a drop to $1,190,000 or thereabouts. I do think there’s a chance we see an increase, say, to $1,218,000 or something that makes us say, “Wow, I sure didn’t see that coming,” but that’s a small chance. I’d be remiss if I didn’t mention that it’s been known to happen.
A return to $1,190,000 places us somewhere into the second week of January, for comparison purposes.
The average home price last September, which is the onset of the fall market, was $1,136,280, so we’re well ahead of last fall. But June’s average home price will set the tone for the summer, and the summer will set the tone for the fall.
As for sales, I showed you this chart last month:
For those who weren’t paying attention, May sales were the worst in TRREB history, save for the pandemic, and pre-2002, which I don’t count, since half the city hadn’t been built…
So what’s in store for June?
Last June, we saw 11,106 sales.
If we held pace with the 7,283 sales in May, then sales would be the lowest in the month of June since 2002.
It’s worth noting that the 11,106 sales in June of 2021 was the third-highest of all time, but June sales averaged 9,413 from 2002 through 2021, so anything shy of, say, 8,000 would provide bearish undertones.
As for new listings, we used to see listings peak around May and June every year, as those were deemed the “best” months to sell. In recent years, we’ve seen the peak hit around March or April.
In May, we saw 18,679 new listings, which was on par with April and down from March.
In June of 2021, we saw 16,189 new listings, down from May, April, and the peak of over 22,000 in March.
For the sake of balance in our market, I would hope that new listings will show 15,000 or thereabouts, but again, I have no note that there’s a shocking number of properties been listed three times in a given month; once at an artificially-low price with an offer date, a second time after the failed offer date when it’s increased in price, then a third time when it’s reduced in price. So, new listings could hit 20,000, and I wouldn’t be surprised.
I’ll likely have a blog post on Wednesday about the TRREB numbers.
You thought my second discussion point would be interest rates, didn’t you?
Don’t worry – it’s my third point.
But before we get to interest rates, we have to discuss the cause of the increase, which is inflation.
Are you tired of hearing the word “inflation” yet? In years prior, our buzz-words were “foreign buyer,” and “bidding war,” and “blind bidding,” but this year it’s that boring ole’ phenomenon that silently steals our savings!
Coming into 2022, we heard bits and pieces about inflation but nothing quite like what we’ve seen in the past few months.
And that makes sense, right?
Inflation was still below 4% this time last year, and when we saw marks of 4.7%, 4.7%, and 4.8% in October, November, and December, the words “cause for concern” began to float around.
You know the rest, right?
5.7% in February.
6.7% in March.
6.8% in April.
And when we started the talk of “interest rates increasing to help inflation decline,” back in March, did we really think it would happen that quickly?
Think it or not, inflation hasn’t subsided.
In fact, the May figure checked in at a whopping 7.7%.
This is after interest rate increases of 0.25% in March, 0.50% in April, and 0.50% in June.
But is inflation solely a function of interest rates?
That’s rhetorical for those in the know.
There are many causes and sources of inflation, and currently, the price of gas, supply chain issues, unemployment, exchange rates, and just a sheer addiction to consumption by Canadians are all major factors.
The price of gas is such a large factor in inflation that there’s a common statistic called “CPI Excluding Gasoline.”
But our government seems to be attempting to fight inflation by addressing one cause, and one cause only, and that’s the interest rate set by the Bank of Canada.
You might ask, “What more can they do?” but that’s not the point. I’m the last person who’s going to vote in favour of a “gas-tax vacation” for six months, but there simply must be other tools in the government’s war-chest.
There was a great article in the Wall Street Journal this weekend:
In the article, people are profiled and offer explanations of where they spent their money before, and where they’re cutting expenditures now.
Some are making coffee at home in the morning and taking it in a thermos to work, rather than spending $2, $5, or $10 on coffee from a chain.
Others are ceasing to go out to restaurants with the same level of regularity.
One woman said she would wear her gym clothes “Until they disintegrate.”
But at home here, what are we doing on a personal level to combat inflation?
How many people signed up for Amazon Prime when the pandemic began? My hand is raised.
How many people started getting groceries delivered in March of 2020, and have continued to do so, since then? My hand is raised.
Low interest rates are merely one reason for inflation, but I think the ridiculous amount of consumption in society since the pandemic began is just as large a factor. I recognize that low interest rates, in theory, could allow people to consume more, but carrying more debt at a cheaper rate, but I’m not talking about that. I’m talking about people who have no problem paying $5.00 for a bottle of water at the Metro Toronto Zoo. I’m talking about Instagram stories from people who seem to be at restaurants for three square meals per day. I’m talking about people that are spending out of control.
That’s a cause of inflation.
Although, so too is a federal government that is also spending out of control, while they lecture us about inflation, and raise interest rates to combat it.
Oh, the irony!
3) Interest Rates
What did we not cover above, you’re asking?
Well, for starters, how about the much-talked-about 0.75% increase in interest rates that’s coming on July 13th?
Oh, maybe it’ll only be 0.50%.
But considering we started the year at 0.25%, and will end up at 2.00% or 2.25% in July, I think many of us need to admit we were wrong.
Speaking of which:
Hello, my name is David Fleming, and I was wrong about what would happen with interest rates in 2022. I predicted no more than two increases, and no more than 100 basis points.
Actually, I think I said at one point, “There’s no way we’ll see back-to-back interest rate increases.”
I hate being wrong.
I might sound like an ass for saying this, but I’m just not used to it. It’s an odd feeling. It’s very humbling. Often, at times, embarrassing.
I guess I just didn’t think the federal government had the guts.
And as I said above, I never thought they’d attempt to address inflation solely by increasing interest rates.
But I also didn’t think they, or any government, would increase government spending while trying to combat inflation by raising interest rates.
And lastly, I didn’t expect 7.7% inflation. Yeah, that one’s a doozie.
So where do interest rates sit by the end of 2022?
We’re going to see the overnight lending rate sit between 2% – 2.25% in two weeks, but could does it end there? Is there another rate hike in the fall?
Scotiabank economist Derek Holt, predicted eight rate hikes in this Bloomberg interview back in October of 2021.
He predicted four hikes in 2022 and another four hikes in 2023.
However, and this is a big however, he predicted the rate would peak at 2.25% when the Bank of Canada was finished.
But we’re going to get to 2.00% or 2.25% on July 13th.
So is it eight rate hikes, or is it a rate of 2.25%? Because at this point, they can’t both be true. If it’s the latter, then it only took four hikes. If it’s the former, then we could see rates over 3.00%.
Raise your hand if you see a rate of 3.00% or higher by the end of 2022. Er, I mean, comment below…
4) Buyer Psychology & Buyer Fatigue
What do I mean by “buyer psychology?”
I mean the mindset that a buyer is in, whether that buyer is brand-new or has been looking for months.
Take the case of a buyer who was looking for a 3-bed, 2-bath, semi-detached house in January for around $1,200,000. Let’s say that buyer made six offers and lost every time, watching prices hit $1,500,000 for some properties that might have sold for $1,200,000 in December. Now, let’s say that buyer is seeing a slew of houses being list with “offers any time,” or houses experiencing failed “offer nights.”
What should that buyer do?
Well, I think the buyer should say, “Geez, I can pay $1,300,000 for a house today that somebody might have paid $1,500,000 for in February.”
In fact, I had clients who did exactly this only a couple of weeks ago!
But other buyers aren’t active in this market.
You’d have to ask them. Every inactive buyer, who was active in the spring, has his or her own reasons. But I suspect it’s buyer fatigue, fear, and confusion.
I’ve often said that, in the stock market, most people would rather buy a stock on the way back up, than the way down, even if they pay more on the way back up.
A stock is trading at $100. It drops to $90, then $80, then $70. You should buy it, right? But you don’t. It drops to $60. Then goes to $70. Then you buy it at $80. Then it goes back to $100, and you’re off to the races.
But this cost you $10.
You thought about buying at $70, but couldn’t pull the trigger, and when it hit $60, you knew you’d just made another $10 on paper – if you pulled the trigger, but didn’t. You instead waited for it to go back up, but not to $70, but rather you waited until it hit $80.
You paid for the comfort, security, and assurance.
Hindsight is 20/20, but tell me there aren’t buyers out there in the real estate market right now, looking at properties that they can get for a whole lot less today than in February, who are still afraid to pull the trigger.
Consumer confidence isn’t exactly hitting records right now:
But again, January versus May isn’t life-altering; 51.51 versus 50.42.
We may not be as confident a bunch in 2022 as we were in 2021, but it’s how the next few months shape up that are what I’m really interested in.
I have to think that buyers in the central core are going to figure this market out, and we’re going to see activity increase in the summer.
With an average of 7,445 sales in August from 2002 through 2021, I’ll go ahead and predict that we see 8,000 plus sales in August this year. Call it a hunch, but we’re going to see above-average activity in the latter half of the summer, once buyers figure out their financing, new buyers enter the market – with a new outlook on interest rates and affordability, and this will provide momentum into the fall.
So those are the four points I wanted to discuss as we look at the road ahead.
There are others, of course. The rental market, housing starts, condo completions, listing and pricing strategies, mortgage products – the list goes on.
I’m happy to entertain your predictions for the road ahead as well, so have your say below.