Sales in GTA’s real estate market are growing, but prices have yet to fully recover

The standoff between buyers and sellers in Toronto’s real estate market persists this month. While sales have increased from last year, it’s crucial to remember that last year was notably challenging. In the grand scheme of things, the fall market has been relatively lackluster compared to the typical September.

Key September points

The Toronto Regional Real Estate Board (TRREB) released its monthly Market Watch report, outlining the following key points:

1. Sales have gone up by 8.5% compared to last year.
2. New listings have increased by 10.5%, slightly surpassing sales.
3. Properties are taking 35-45% longer to sell than last September.
4. Due to the sluggish sales cycle, active listings have surged by 35.5%! The accumulation of supply is becoming significant.
5. House prices are still declining — nominally 1.0% below last year, with real house prices dropping by 3.0% when adjusted for inflation.

Source: TRREB

Recovery or rebalancing?

TRREB suggests that the increase in sales is a result of favorable market conditions, such as interest rate cuts and revised mortgage lending guidelines. While these factors are crucial for recovery, a deeper analysis indicates that the GTA market might be more balanced rather than on a trajectory towards full recovery.

It’s essential to view this as a long-term “sideways” market rather than an “upward” one. The significant factor here is the growth rate in supply, which has surpassed demand, challenging the concept of a straightforward recovery. Until there is a meaningful shift towards buyers entering the market faster than sellers, a complete recovery seems unlikely.

Sales increase due to new opportunities for buyers, but price remains a critical factor

The 8.5% year-over-year rise in home sales (4,996 in September 2024, up from 4,606 in September 2023) is seen as a sign of recovery. TRREB President Jennifer Pearce attributes this increase to buyers taking advantage of lower borrowing costs and adjustments to mortgage lending guidelines.

These adjustments include:

1. Rate cuts from the Bank of Canada
2. Reduced five-year fixed mortgages due to a declining Canadian five-year bond yield
3. Upcoming introduction of longer amortization periods
4. Ability to insure mortgages for homes valued up to $1.5 million

While these changes make the market more accessible for some buyers limited by capital costs and lending conditions, the B20 stress test still in place and buyers qualifying at rates above 5.0% suggest that price is ultimately the most crucial factor for many buyers re-entering the market.

Easing of stress test could enhance market stability

TRREB emphasizes that the relaxation of mortgage stress tests for existing homeowners upon renewal could add stability to the market by enabling homeowners and investors to afford keeping their properties instead of selling under financial pressure.

TRREB also anticipates further rate cuts to increase the number of households that can afford homeownership. This particularly targets first-time buyers, identified by the Bank of Canada as nearly half of all homebuyers, a crucial demographic for those anticipating a market recovery.

Supply outpacing demand

A detailed analysis reveals a nuanced picture. While demand (measured in sales) has grown, the rate of new listings entering the market has increased even more rapidly, by 10.5% year-over-year, slightly exceeding sales growth. In September, 18,089 new listings were added to the MLS, contributing to an already well-supplied market. This disparity between supply and demand, instead of signaling a shortage of homes, indicates a relaxation of market pressures and a more favorable environment for buyers.

Moreover, there is a notable increase in the “time to sell” — meaning it takes an additional week for a listing to sell compared to the average 20 days on the market from September last year. This slower absorption has led to supply accumulation, with active listings now up by 35.5% compared to September 2023.

Ability to negotiate on price: Indicates a market no longer heavily favored to sellers

If this trend persists, it is reasonable to expect that buyers will resume their home search as they encounter more properties on the market and hope to leverage the supply, explore options, and negotiate with sellers. This further solidifies the imbalance between supply and demand, leading to a decline in prices.

The MLS Home Price Index Composite benchmark dropped by 4.6% year-over-year, and the average selling price in September decreased by 1.0% compared to the previous year.

TRREB attributes this to increased bargaining power for buyers, particularly in the more affordable segments like condominiums and townhouses, which are favored by…