Toronto’s housing market took a dive in May. After years of record highs in housing sales and prices, the hype seems to have evaporated. While some link the slowdown to the Ontario government’s legislation to tighten lending in housing markets, one should also factor in the unusually cold, dark, and wet weather in May that felt more like a ‘May-be.'
Housing sales in the greater Toronto area (GTA) were down 23% last month from a year earlier. However, the average sales price was 14.8% higher than the price in May 2016. On a month-by-month basis, housing prices in May were down by 6% than the prices in April.
The declining numbers have alarmed homebuyers, sellers, brokerages, and governments. Many are questioning if the Ontario government’s intervention has a more adverse impact than was intended. Homebuyers, who have not yet closed on properties, are wondering whether they have paid too much, while sellers are rushing to list properties to benefit from high housing prices that appear to be past their peak.
While it is too early to determine the ‘causal impact’ of the legislative changes introduced in April, which included a 15% tax on foreign home buyers, one must also consider other mitigating factors that might have affected Toronto’s housing market. We must even consider the influence of the weather.
The unusually cold weather in May might have had a chilling effect on housing sales. Typically, housing markets start to heat up in April while being in synch with the rising temperatures. May 2017 was unusually wet. Toronto received a total of 157 mm of precipitation last month compared to 25 mm a year ago. The unusually high rainfall caused flooding all across Ontario. In downtown Toronto, Lake Ontario water rushed into lakefront condos. At the same time, May 2017 was unusually cooler than last year. The average temperature last month was 12 degrees Celsius compared to 16 degrees in May 2016. May was also unusually dark with much less sunshine. However, Toronto saw this trend since January 2017 when it received a mere 50 hours of sunlight compared to the seasonal average of 85 hours.
So why should an unusually cold, dark, and wet weather have any impact on housing markets? Research has shown that weather and atmosphere influence consumer behavior. Retail experts call this phenomenon ‘store atmospherics’ where a store’s environment is altered to enhance consumer behavior that may promote sales. It applies to housing markets as well. Researchers discovered that adverse weather has a significant, yet the short-term effect on economic activity. Writing in Real Estate Economics, John Goodman Jr. found a slight adverse impact of unseasonable weather on housing markets. In related work, researchers found that sale prices of homes with central air-conditioning and swimming pools are higher for sales recorded in summer months.
There are other factors to consider in assessing the market dip. The Ontario government’s regulations to tighten housing markets could have encouraged some homebuyers to advance their purchase to avoid uncertainty. The government’s plans to impose new restrictions on housing markets were known in advance of their announcement in April. Investors are risk and uncertainty averse. Hence some homebuyers could have advanced their purchase to March when the sales unexpectedly jumped by 50% over February 2017. As for those who could not advance their purchase to March, they may have decided to sit through this confusion and wait for calmer markets to prevail.
In earlier research, we documented a similar trend for housing sales in Toronto, when sales escalated in 2007 in advance of Toronto’s new land transfer tax, which was implemented in February 2008. The additional sales recorded in 2007 meant that fewer sales were realized in 2008. The sales activity returned to the long-term trends in a couple of years.
And if this was not enough, financial troubles at the alternative mortgage lender, Home Capital, spooked borrowers who were not deemed mortgage worthy by the mainstream Canadian banks. Many real estate professionals believe the cumulative effect of unseasonal weather, tightening of mortgage regulations, and troubles at alternative lenders were likely the reason behind the declining housing sales and prices.
The roof is not collapsing on Toronto’s housing market. The decline in sales and prices is a rational response by homebuyers and sellers who are reacting to Ontario government’s initiatives to tighten lending in housing markets. The cold, dark, and wet weather certainly did not help either.