The Market is getting Smaller

As sales rebound, new listings remain low and prices move higher, there continue to be oddities to follow in Toronto’s housing market. Most notably is the disconnect between prices in the detached and condo sectors. This summer for the first time in recent memory condos passed the half way mark to detached home prices. The fact that this closing price gap has occurred may actually offer meaningful insights into the broader question of how much housing Toronto and GTA households can afford.

price ratio d to cSource: TREB, Six Housing

At their peak, detached homes in Toronto were moving closer to being 3 times more expensive than condos before detached prices fell and condos soared. Over the last three years, the price ratio between the two sectors has dropped from detached homes being 2.7 times greater than condos down to under 2. Meaning condos are now more than half as expensive as detached homes and the gap keeps dropping.

price gap d to cSource: TREB, Six Housing Sense

With prices increasing it may be tempting to think that the ratio is shrinking but the real dollar price gap is still growing; however, that is not the case. The price gap between detached homes and condos in Toronto peaked in April 2017 at $762,100 and has since fallen by over $200,000. The real dollar gap has been fairly stable over the past two years, now sitting at $557,600 (just under the price of the benchmark condo, which is $578,000).

price gap sf to cSource: BILD – Altus, Six Housing Sense

This trend is even tighter in the new housing market. It is not a perfect comparison, as the initial graphs show Toronto prices while the new housing market reflects the entire GTA; however, from this graph we see just how much the price gap has closed. At its peak the new single-family homes to condos price difference was $672,366. This amount has since fallen by over $400,000 to $242,559. The closing price gap has been a perfect storm of falling detached prices and rising condo prices.

So what, if anything, can be extracted from this closing price gap trend? With mortgages rates having returned to an all time low, buyers have slowly been returning to the market, and yet, even with the increased sales and low inventory, upper end prices are not increasing at the same rate. This would suggest buyers are tapped out, only able to drive up prices at the lower end of the market. Yes, detached prices are increasing (on the resale market) but not nearly at the same rate as less expensive condos.

This may be why we are seeing the price floor continue to be raised in the GTA while the ceiling is staying level. Buyers are able to maintain the current level of detached home prices, but the ability to drive them much higher has been greatly reduced. Likewise, buyers eager or just plain desperate to get into the market are competing for lower priced condos, which is resulting in far more pressure on entry level purchases.

In the long run economies are always expected to return to balance. The average price ratio between detached homes and condos over the past six years has been 2.3 (detached homes are 2.3 times more expensive than condos). For balance to return, detached home prices would have to increase by over $200,000, or condo prices need to drop by nearly $100,000. So either bet on richer buyers returning and detached home prices spiking again or get ready for condos to be in for an adjustment.

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