Month after month, the real estate industry churns out numbers designed to obfuscate and mislead. And it works. Despite record debt, unreal prices and the growing risk of painful losses, most people you know are still house horny, right?. They’ve been conditioned to think that financial assets are scary and real estate’s safe. Proof? Look at the comments posted here yesterday. Worthy of a pathetic blog.
Real estate boards were once content to shove average numbers down consumers’ gullets, even when they didn’t reflect median values or emerging trends. Now it’s worse. Major boards have adopted the fabricated ‘MLS Home Price Index’, making it virtually impossible to detect shifting market conditions. The frankenumber was hatched just as housing was set to enter its big slide. Talk about coincidence!
Let’s scratch at the numbers released in Toronto yesterday. Here’s what the realtor cartel had to say:
The average selling price in the first half of July was $473,466 – up by 2.3 per cent compared to last year. On average, homes sold for 98 per cent of the asking price in 25 days – in line with July 2011. Price growth was strongest in the City of Toronto, climbing by 3.5 per cent to $496,645.
“A better supplied market contributed to a slower annual rate of price growth in July relative to the first half of 2012,” said Jason Mercer, TREB’s Senior Manager of Market Analysis.
And what do you think the average granite-lusty reader of the Toronto Star will think when absorbing that? Of course. The market’s hot, especially in the downtown areas. So, let’s buy that condo, babe!
This is exactly what the industry wants you to believe, even as the foundations start to crumble beneath it in the wake of new lending regulations, flatlining incomes, ballooning listings and eroding prices and sales. But how could things be the least negative when the ‘authorities’ say they’re swell?
Easy. Numbers lie, and they conceal.
For example, while the real estate board says “price growth was strongest in the City of Toronto, climbing 3.5%,” when it comes to detached homes the opposite is true. Sales fell in the centre (down 4%, even when unbuilt condos are added in, fudging the stats), and prices went south. Consider the market value of a SFH in 416, which has just tumbled to the lowest point since January.
In March that average home was trading hands for $842,235. By June it had wavered a little, down to $817,678. And by last week it had plunged to $728,834. That’s a decline of 13% from the spring, and a withering 10.8% in a single month.
Realtors are blaming Toronto’s dumbass double land transfer tax, which would be valid if it had been introduced in, say, May. But the thing is now four and a half years old and part of the woodwork. The reason prices just tumbled should be obvious to everyone: they rose too far too fast on a wave of cheap money, lax lending and public avarice. Houses reached the point of unaffordability in both Toronto and Vancouver this Spring, and now there’s only one direction in which to travel, pushed along by a government terrified of a bursting bubble.
This is not news to Ross Kay, a GTA realtor who risks shunning and prolonged backroom torture at the next CREA convention for reading this blog. “Since your site is one of the few to try and separate the truth from the propaganda, I thought I would forward the following,” he says.
Real Estate values have truthfully fallen far further than is being reported in both Vancouver and the GTA (even Oakville). The public, through marketing vehicles like average home prices, regional real estate association average monthly home sales statistics and most recently the HPI, are having their attention diverted from reality to a statistic that holds little value.
In a rising market, like the one the GTA has seen since 2000, the actual market value of a home is established from the last sale price of a similar home. It is not an average of the last 3 sales, but rather based on how high the last one sold for and can we get anymore. Where 3 similar homes over the last 45 days sell for 300,000, 305,000 and then $345,000 (the last in a competitive bidding war) the next home listed (assuming no big negative features) will not be the average of $316,666 but rather $349,900. After that 345 sales takes place buyers, sellers and agents all assume the next sale will be even more and act accordingly. THIS SHOULD BE VIEWED AS PEAK PRICING
In a stable market, where the buyers and sellers are under equal pressures, the average sale price is valid. So, in the example above the next home listed would probably be $319,900 at list with a willingness to accept anything over $305,000 being the understanding of buyer, seller and agent. THIS SHOULD BE VIEWED AS AVERAGE PRICING
In a declining market, where sellers outnumber buyers, the average sale price is again not valid. In the above example the next home listed would be $309,900 with the seller and agent praying to get an offer of $300,000 but with a buyer thinking $295,000. THIS SHOULD BE VIEWED AS TROUGH PRICING.
So how does this apply to the market as it exists now? It was not unusual in the GTA to see homes sell for 15% over list in competitive bidding wars. Those wars have basically ended (unless the home is truly under priced). That $345,000 home has quickly returned to $305,000 or a reduction of $40,000 overnight. The math quickly adds up to an 11.6% drop.
So the truth is, the bubble burst the day the bidding wars stopped. The unlucky few who purchased at PEAK PRICING have already lost about 12% equity and in most cases are already living in a home 7-9% over mortgaged (as they bought with 5% down). In some cases where Fees and Cash back was involved, they are already in a 10-15% negative position.
I wonder why CMHC or any other real estate voice doesn’t communicate this truth. The truth is: “If you bought at PEAK PRICING” with less than 15% down, you are already under water with your mortgage, even if that purchase took place one month ago.”
The reason’s simple, Ross. People can’t handle the truth. They believe they’re richer than they think. We are so screwed.