Home sales, prices set records in 2005 - 01/07/06 Toronto Star

Hot market defies analyst forecasts: Low rates, income gains fuel growth

By Tony Wong
BUSINESS REPORTER
Saturday, January 7, 2006

It was supposed to be the year the hot housing market finally cooled down, but 2005 turned out to be the best year ever for resale homes in Toronto Real Estate Board history.

A record-breaking 84,145 existing homes changed hands last year, the board reported yesterday, beating the previous record of 83,501 sales recorded in 2004 by almost 1 per cent.
Homeowners can also rejoice, since the average price was the highest ever recorded for the Toronto area at $335,907, up 6 per cent from the previous year.

``It comes down to the same issues over and over again, and that means affordability combined with good job and income growth, which helped drive the market,'' said Peter Norman, vice-president of Toronto housing research firm Clayton Research.

Most analysts, including Norman, were expecting 2005 sales to lag slightly behind the 2004 record, especially since the current upswing in the housing-market cycle, which started in 1996, has been a particularly long one.

But the economy was far more resilient than most economists had bargained for.

``At the start of last year we were worried about high oil prices impacting the economy, then it was the high Canadian dollar and interest rates shooting up, but we ended up with better economic and employment growth than expected and interest rates didn't go up quite as high as people expected,'' Norman said.

More jobs and good income gains resulted in more buyers being able to afford a home.

The Toronto Census Metropolitan Area's 3.9 per cent year-over-year GDP growth rate was the highest the city has recorded since 2001, according to housing analyst Will Dunning.

"While manufacturing is weak, expansion in the financial services sector is generating growth in the Toronto economy," Dunning said.

Still, the solid numbers resulted in more than 4,255 sales in December alone, the second-best performance on record for that month.

Economists see 2006 as the year home sales will — finally — wind down. Norman says one sign is that new home construction already peaked in 2004 and the resale home market tends to follow that trend.

"There is obviously room for the market to slow down, especially since at some point in time you run out of pent-up demand and first-time buyers in the market," said Norman.

New construction has also been on a tear, which will add to the pool of available homes, helping to moderate the market.

``From a long-term demographic standpoint, especially on the new construction side, we have been overproducing,'' Norman said.

For 2006, Dunning expects average prices to rise by a moderate 4 per cent, to $348,100.

"Listing volumes remain high, and the sales-to-new-listings ratio continues to indicate that price growth should decelerate," said Dunning in a recent report.

However, the analyst warned that "strong growth in the financial sector is generating a lot of new wealth, which is supporting continued house price growth."

Dunning also expects new- home sales, particularly in the hot condominium market, to drop from 16,500 high-rise sales in 2005 to 11,700 in 2006.

So many condos are being built that Dunning expects the vacancy rate in the city to rise significantly in the coming years, peaking at 6.1 per cent in 2009. The forecast for 2006 is 4.6 per cent.

Slowing employment growth will likely reduce demand for apartments, Dunning said.