Making Sense of Plummeting Sales and Rising Prices

Written by Natalka Falcomer, Vice President Corporate Development

Why are housing prices increasing while sales are “plummeting”? This is because fewer sales don’t, on its own, mean a weak market. Rather, fewer sales in the context of few listings and a lot of demand do lead to fewer sales, but it also leads to higher prices. This is because of the simple price equation we all have grown to know and love: low supply + high demand = rising prices. The recent price of toilet paper is a good example of this equation in action. 

Who’s Buying? 

Plagues, war and economic uncertainty don’t affect all people equally, no matter what Madonna tells you from her tub (see Madonna, COVID-19 Rant https://globalnews.ca/news/6719291/madonna-coronavirus-bathtub-rant/). As such, demand for just about everything can and does persist regardless of the political or economic context. This is especially true when it comes to our basic needs such as shelter and food and Netflix. Thus, what’s throwing off the rapid decline in housing prices that everyone anticipated is the number of sellers. Why? The strength of the housing market. 

Today, housing prices aren’t declining at the same pace, if at all, as the declines in the stock market. Such housing price stability disinclines sellers to sell because their homes appear relatively more stable than their stock portfolio. What is more, opening your doors to buyers can invite more than just an offer, it can also invite COVID-19.  As such, we have fewer sellers than buyers. This means that housing prices continue to remain stable which further discourages even more sellers from selling. It’s this self-fulfilling prophecy that has caused the national aggregate MLS Housing Price Index to rise 6.9% year over year despite the chaos in which we live. The question is: how long will it last? 

How long will it last? 

Even though prices have increased that doesn’t mean that the housing market isn’t changing.  Apart from London and Ottawa, most major cities in Ontario, including Toronto, have finally entered a “balanced” market. Finally, supply isn’t outstripping demand at rates we’ve borne witness to over the last several years. This fact makes it clear: the market has changed. However, what isn’t clear is if once red hot markets such as Toronto’s will continue to slide from a “seller’s” market (read: high prices and unaffordable) to a “balanced market” (read: less high prices, but still unaffordable) to a “buyer’s” market (read: affordable). 

Certainly, the grinding halt of our economy will push down the number of buyers who could have afforded a home if the market had become balanced while they still had their jobs; but will it also push up the number of sellers to eclipse the number of buyers and, therefore, decrease housing prices? In a world where mortgage deferrals were not an option, I’d conclude with a resounding “yes”. However, that’s not the world in which we live. To be sure, sellers are not impervious to the financial pressures experienced by buyers. Sellers too are losing their jobs and facing stricter financing rules as many banks are tightening access to credit such as home equity loans.  But, the much welcome intervention in the form of government subsidies and mortgage deferrals has, at the very least, temporarily reduced the pain invariably brought by economic strife. Time will only tell if the relief will persist until the pain ceases to exist.