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.
