Who will give up first: Toronto’s real estate sellers or buyers?

Since the beginning of 2022, industry experts have been expecting a decrease in Toronto real estate prices.

And it really happened. The average home price in Toronto went down from February to July by 19.5%.

Nevertheless, such a decline was not as sharp as many specialists had predicted. Moreover, the drops halted during the previous three months with the average home price going up slightly by 0.5% in each of the last three months.

So what could cause this unexpected strength in Toronto housing prices? And what is the most likely scenario for the remainder of 2022 and for 2023?

The main factor causing this relative strength of Toronto home prices over the previous few months was the fact that the drop in home sales was almost fully matched by the decrease in new listings.

It means that the supply of homes for sale showed the same decline as the demand, which provided the market with balanced conditions.

Nevertheless, from the very beginning of this year, as sellers were optimistic while buyers became skeptical, the sales-to-new-listings ratio went down to 39% in May, marking buyers’ market. But later, the decreases halted.

In addition to it, some small gradual increases were seen, and the sales-to-new-listings ratio reached about 50% during the August–October period. It seems that sellers are now at least as skeptical as buyers used to be. This has led to the average home price going up slightly in each of the last three months.

It looks like buyers and sellers in the Toronto real estate market are involved in some kind of a market game where each group has temporarily postponed their plans to buy or sell. Both buyers and sellers hope that the other group will give up first, start acting, influence the supply (sellers) or demand (buyers) and cause home prices to either keep falling or moderately growing.

Various socioeconomic and psychological factors affect the possible outcome of this high-stakes game. One of the main factors is the prospect and the depth of a downturn in economic activity and growing unemployment next year.

As the Bank of Canada is determined to fight inflation with interest rate hikes, the prospect of a recession and higher unemployment in the near future seems quite possible.

In this scenario, potential homebuyers may be more likely to postpone their purchase than the sellers. The latter group would feel more pressure to list their property because of different reasons: financial, work, family.

It means that the possibility of a recession in 2023 will reduce or postpone the market demand more than the supply will grow. This should put further downward pressure on home prices in the coming months.