Since the start of the year, industry analysts and major media have been predicting a decline in Toronto house prices.

And indeed, the decline has happened. The average price of all homes sold in Toronto has declined steadily from February to July of this year (see chart below).

However, the 19.5% decline in the February–July period was not as steep as many observers had expected. Furthermore, declines halted in the last three months as the average home price edged up by an average 0.5% in each of the last three months.

What could be the reason for this unexpected strength in Toronto home prices? And what is the likely scenario for the remainder of this year and for 2023?

The supply factor

The main reason for the relative strength of Toronto home prices in the last few months was the fact that the decline in home sales was practically matched by the decline in new listings of homes for sale.

In other words, the supply of homes for sale declined as much as the demand, which kept the market in a balanced position. This is well illustrated by the ratio of sales-to-new listings (see chart below).

When this ratio is, say, 60%, it simply means that in a given month there are 60 sales for every 100 new listings. Traditionally, a ratio in the 40%–60% range is considered a sign of a “balanced” market, while ratios above or below that range indicate “sellers’” and “buyers’” markets, respectively.

The sales-to-new-listings ratio in the Greater Toronto Area (GTA) was in the sellers’ range (above 60%) throughout 2021 and then rose to above 80% in the second part of the year.

Right from the start of 2022, however, as sellers remained optimistic while buyers became skeptical, the sales-to-new-listings ratio declined steadily to 39% in May—buyers’ market territory. However, declines halted in the following months.

To the surprise of many, small gradual increases have happened, and the sales-to-new-listings ratio hovered around a balanced 50% range in the August–October period. It appears that sellers have now become at least as skeptical as buyers were earlier. As a result of a more balanced supply and demand, the average price of all sold homes edged up in each of the last three months.

Taking a ‘wait-and-see’ approach

It appears that buyers and sellers in the Toronto housing market are engaged in a market game where each group has temporarily put their respective buy/sell plans on hold. Both buyers and sellers hope that the other side will “blink first,” make a move, affect the supply (sellers) or demand (buyers) and thus cause home prices to either decline further or continue a mild upward trend.

Many complex socioeconomic and psychological factors play a role in determining the outcome of this high-stakes buyers/sellers game. Among them, one looms large—the prospect and the depth of a downturn in economic activity and rising unemployment in 2023.

As the Bank of Canada seems determined to fight inflation with rising interest rates at practically any cost, the prospect of a recession and rising unemployment in the near future seems probable.

Under this scenario, it would be reasonable to assume that potential homebuyers could more easily postpone their decisions to enter the market than home sellers. The latter group would clearly be more pressed to offer their homes for sale due to financial, work, family, etc., reasons.

In other words, the likelihood of a recession in 2023 will reduce, or at least postpone, the demand for home purchases more than the supply of homes offered for sale. This is bound to put further downward pressure on prices in the coming months.

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Last modified: November 11, 2022