Leveraging Inventory Levels & Hindsight

Hindsight is great. In hindsight, so many things that happened become obvious, and Toronto’s housing market is no different. In 2016, detached inventory levels were dropping while sales were climbing, so the pressure on prices was immense. While it may have been a stretch to predict that 30% gains would happen, significant gains should have been crystal clear.

Unfortunately, predicting the future does not have the benefit of hindsight, so we can only move forward taking lessons from what happened in the past. With that said, we can leverage this history to help us moving forward. Sales to active listings statistics have often provided great insight into what is likely to happen next in a housing market. Traditionally, how sales are performing compared to the amount of inventory on the market will strongly dictate how prices will trend moving forward. In the two graphs below, we see how Toronto’s detached and condo markets’ prices fared through varying movements in the sales to active listings ratio.

Detached active listingsSource: TREB, Six Housing Sense

In the detached housing sector, we see high sales to active listings ratios throughout 2014 and 2015. During this time, the corresponding price gains were reliable, regularly tracking between 8-11% year-over-year. In 2016 the ratio began to skyrocket, getting as high as 130% in June, and prices followed. Both stats popped in April 2017, with tons of new listings hitting the market, while sales dropped and prices finally gave up some of the ground they had achieved.

This tipping point takes us to where we sit today. Since then the ratio has consistently been at its lowest level in the past five years, drifting between 30-40%. These lower ratios have taken the pressure off prices, leading to fairly stagnant price levels. This information can help us navigate the 2019 housing market, as the current decreased sale levels will almost certainly keep these ratios low, which should continue to hold detached prices in check.

Condo active listingsSource: TREB, Six Housing Sense

Toronto’s condo market offers the same price guidance as the detached. Throughout 2014 and 2015 the sales to active listings ratio was below 40%, giving buyers plenty of selection and holding prices to limited growth. This changed in 2016 when sales grew by over 10% and new listings shrunk by the same amount. The reduction in active inventory led to a monumental climb in the ratio, which peaked at 168% in March 2017. The limited inventory vaulted condo prices, with year-over-year gains growing throughout 2016.  While the percentages peaked in 2017, prices never came down. High sales to active listing ratios continued through 2017 and into 2018, and prices have maintained strong gains the whole time.

However, even the condo market’s sales to active listings ratio is starting to come back down, and though it is not yet at pre-2016 levels, prices should experience reduced pressures going forward. With sales continuing to fall and inventory steadily rising again, the condo market may finally give back some of the incredible price gains it achieved over the past two years. Therefore tracking inventory levels will be critical to understanding condo price movements in the future.

Hindsight is great – it’s hard to argue that – but leveraging its lessons can be almost as beneficial. Toronto’s housing market history shows us what happens to prices as inventory levels rise and fall. Over the past couple of months, inventory levels have been rising, especially in relation to sales, and right now it appears this trend will continue. If it does, this should put downward pressure on prices and finally put the buyer back in control. However, there are many external factors that could change market conditions quickly, so tracking the sales to active listings ratio will be vital to ensuring you are not looking back wishing you had acted differently.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s