The ratio of Toronto house listings compared with monthly sales has moved back into long-term balance, limiting the potential for significant further price corrections in the region, a new analysis concludes.
A report by National Bank of Canada economist Marc Pinsonneault said the ratio of listings to sales in the Toronto area hit 2.5 months in August, which means it would take 2.5 months to sell all houses listed in the region at the pace of sales recorded last month. That's a significant change from earlier this year as the ratio hit a low of 0.66 months in February because of a lack of inventory available for sale in the city.
Mr. Pinsonneault said the ratio has now climbed back to its long-term average level of 2.5 per cent, last seen in 2012, which suggests the market is in balance in the region, limiting the risk of a significant further price correction.
"A few years ago we would say this is a normal ratio," he said in an interview. "It limits the potential for price correction. In order to exacerbate a price correction, it would have to be much higher than that, to the levels we saw during the recession … but that's not the case."
The analysis adds more fuel to predictions the Toronto region may have already experienced the bulk of its price drop after average home prices across the Greater Toronto Area fell by more than 20 per cent from the peak in April to August.
But Mr. Pinsonneault is nonetheless warning home prices may still have some room to decline because of the potential for further interest-rate increases this year and the possibility of tougher mortgage qualification rules from Canada's banking regulator, the Office of the Superintendent of Financial Institutions. OSFI published a proposal for comment in July, which could take effect this fall, that would require home buyers who do not need mortgage insurance to prove they could still afford their mortgages if interest rates were two percentage points higher than the rate offered by their banks.
While not expecting a price crash in the GTA, Mr. Pinsonneault said there could be a 10-per-cent drop in prices over the next 12 months in Toronto, based on the Teranet-National Bank House Price Index level.
The index, which combines three prior months of sales data to smooth out monthly fluctuations, showed prices fell 0.4 per cent in Toronto in August compared with July, according to data released Wednesday. It was the first decline recorded for Toronto since January, 2016. On an "unsmoothed" basis for August alone, the average sale price in Toronto fell 4.2 per cent in August from July, National Bank reported.
The index measures home sales when the deals close and are recorded with land registry offices, so it tends to lag data published monthly by local real estate boards that report on sales negotiated in the prior month. The Teranet data reflects market trends, but is not as quick to show a rapid turn in the market like Toronto saw when average prices began to drop in May after soaring in March and April.
For Canada as a whole, the Teranet-National Bank index rose 0.6 per cent in August from July, despite Toronto's decline. Prices in Vancouver rose 2.4 per cent, Victoria was up 1.8 per cent and Ottawa-Gatineau rose 1.4 per cent. Montreal posted a decline of 0.1 per cent in August.
Compared with August last year, the index price was up 13.1 per cent nationally, including an annual gain of 23.9 per cent in Toronto.
Mr. Pinsonneault said that if the Teranet-National Bank index price falls by 10 per cent in Toronto in the next 12 months as predicted, it would not be a lot for the market considering the recent gain.