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The Toronto area's real estate market appears to be losing energy in February after a microburst of buying as the new year kicked off.

John Pasalis, president of Realosophy Realty Inc., says the momentum he was seeing up until about the third week of January has dissipated. Sales have dropped in recent weeks compared with this time last year and the declines are becoming steeper.

"They're trending down, and that's what's interesting," Mr. Pasalis says, adding that his analysis is revealing sharper sales decreases each week.

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Mr. Pasalis isn't sure of the reason for the shift in tempo but he suspects some potential buyers are feeling priced out of the market after interest rates started creeping up and a new "stress test" on uninsured mortgages came into effect on Jan. 1. Others, he suspects, are trying to time the market as they anticipate a spate of negative numbers from the Toronto Real Estate Board in the months to come.

"Some of them are almost hoping for that – for some panic – to take advantage of that."

Market watchers have been expecting sales in the first quarter of 2018 to show a marked slowdown from the unharnessed run in the opening months of 2017. But Mr. Pasalis says sales so far in February are below historical norms.

Sales in the Greater Toronto Area plunged 33 per cent in the first two weeks of February compared with the same period last year. Once again, detached houses led the decline, says Mr. Pasalis, with a 40 per cent drop. Sales of condo units fell 27 per cent in the first half of February compared with the same period in February of 2017.

Delving further into the numbers, Mr. Pasalis says, sales decreased 28 per cent in the 416 area code of Toronto and 36 per cent in the surrounding 905.

The average price in the GTA dipped 12 per cent in the first two weeks of February compared with the same period last year.

New listings rose six per cent in the GTA in the first half of February compared with the same period in 2017.

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Mr. Pasalis says the mood is completely different from this time last year when prices were climbing at such a dizzying rate that "fear of missing out" gripped the market. Buyers were willing to accept huge compromises because they were petrified that waiting would mean they would have to settle for even less a few weeks down the road.

This year buyers have a different mindset because sales are slower and, while values are lofty, they're no longer climbing at a dizzying pace.

"When you're spending 100 per cent of your budget and you don't love the house, there's reason to be more patient."

David Madani, senior economist at Capital Economics, is seeing tentative signs that the tightening in mortgage rules and increases in interest rates more recently are beginning to slow the growth in household spending.

He is seeing signals that some households are already beginning to struggle with rising borrowing costs, adding that heavily-indebted Canadian consumers have obviously become accustomed to extraordinary low interest rates.

Mr. Madani points to retail sales data which suggests that household spending softened considerably at the end of last year. And while there's no evidence of an upswing in consumer bankruptcies yet, it does appear that debt restructuring has risen significantly, Mr. Madani says.

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Jimmy Molloy, a real estate agent with Chestnut Park Real Estate Ltd., believes some buyers at the entry level are feeling restrained by the mortgage "stress test" that banks and some other lenders began applying on Jan. 1.

"When you're making that first plunge into the pool," you're nervous.

The market works from the bottom up, he says, so when buyers in the low-to-middle segments are hesitant, move-up buyers also move more slowly.

Higher interest rates, the stress test and the large price gap between other housing types and detached homes makes the leap difficult for many potential buyers. The detached house market in the 905 area has a fair amount of inventory, he says, and some areas of the 416 also have a good supply.

"Detached houses are not flying off the shelves," he says. "It's not like we're being swamped but the absorption rate is a bit slower."

People in the middle of the market are often looking at the high cost of jumping from a three-bedroom house to a larger one and deciding to stay put and renovate, he says.

Meanwhile, he has several buyers looking in the $4-million-and-up range, and they are having difficulty finding something to buy.

In the carriage trade neighbourhoods of Rosedale, Forest Hill and the Annex, there are very few properties to show. He has been talking with many homeowners who plan to downsize from large houses in those areas but they can't find a condo unit that provides the right blend of size, character and location.

"I have a bunch of people who would like to buy great condos and there's not a lot of product out there."

Robin Pope of Pope Real Estate Ltd. says the Toronto condo market is on fire. He has sold several units in recent weeks, with eight to 10 bidders typically vying for each property.

Mr. Pope cautions, however, that the marketing strategy is important. In some cases, sellers haven't done as well as they might have because of poor tactics.

He points to a condo unit listed for sale this month on voguish King Street West with an asking price of $449,900 and an offer date one week later. Two days before the scheduled offer date, a condo of similar size was listed at the same asking price in a neighbouring building. The second unit had a parking space, which typically adds $40,000, Mr. Pope says. That property also had an offer date set for one week after listing.

A bully quickly stepped forward and put a bid of $508,000 on the table for the second unit and the seller accepted, says Mr. Pope. Two days later, the unit without parking sold on its offer date for $504,000.

Mr. Pope figures the seller who listed and then snatched at the bully offer acted too quickly. By waiting to see the result of the other contest, he or she could have held out for more.

"Although the asking price for both was the same, clearly the unit with parking was worth more," he says. "In hindsight, it seems they should have waited two days to see how it played out before listing or considering a pre-emptive offer."

The market for houses in central Toronto – especially for any property up to $1-million or so – is still quite competitive," Mr. Pasalis says.

Very desirable houses along the subway line are still attracting multiple offers, he says, but the bidding frenzies of last year have diminished.

In the 905 areas ringing the core, buyers and sellers are in a stand-off.

One agent in his office had a listing in York Region with an asking price of $1.7-million. The property languished for months but the sellers insisted on trying to achieve the same price that neighbouring houses sold for last spring.

After a series of gradual cuts, the asking price was lowered to $1.4-million. That was still too high for the buyers, says Mr. Pasalis, and the sellers eventually settled for $1.33-million.

"It's a big decline from where they originally were and a slow process."

Mr. Pasalis says a lot of sellers are adamantly sticking to their price and buyers are just as stubborn in waiting for them to adjust their expectations. That's the reason inventory is so high in the 905 area, he says.

"It's frustrating for buyers because you don't want to overpay," he says, but they can't move forward if sellers won't budge.

As for prospective sellers, some homeowners are considering listing but they're worried that the market is soft. Mr. Pasalis knows of some who think they might fetch a higher price in May or even next fall.

Mr. Pasalis says he is advising homeowners – especially those who need to sell – to list while the competition is fairly light. It's impossible to predict where the market will be later this year, he warns. "It's not always great to time the market."

Mr. Pasalis points to the plight of sellers in the spring of 2017 when the market went from a parabolic rise to almost a dead stop in a few weeks after the Government of Ontario introduced new policies aimed at taming the wild run.

Homeowners who are hoping for a return to the rich values that properties were trading at this time last year may not see those numbers for a long time, he says. But people view declines from those levels as a loss, even if the profits were only on paper. "This loss aversion that people have is kind of playing out. That's the psychology of the seller right now."

Mr. Molloy hopes that the spring market will pick up with more listings. At the moment, homeowners are reluctant to list an existing property because they know it will be hard to find the next one.

"People are always asking: 'Is this the right time?'" he says. "Sometimes you deal with people for years and they're not psychologically ready. They're selling the family home. It's trying to someone out of their house to list it."

Mr. Molloy has tried to bring buyers and sellers together when he knows that a buyer is very keen to be on a particular street and a homeowner might be tempted to sell privately. But such deals can be difficult to arrange because the sellers tend to have lofty expectations. "Everyone knows there's a premium when there's a lack of supply or something's not on the market."

Mr. Molloy says sales statistics showing big drops from this time last year may unsettle some consumers but he calls early 2017 an aberration. "Last year was so overheated for the first four months, that it was never going to be repeated," he says.

He doesn't expect the same frenzy this year, even when more properties begin to arrive on the market. "The market is pretty stable. It shouldn't have increases of 20 per cent year-over-year. That isn't stable."

While the Toronto area remains in a holding pattern, few are calling for more government intervention.

Looking towards British Columbia, where the provincial government recently brought in broader taxation and more policies aimed at reining in investors, Mr. Pasalis says Ontario may have to consider similar measures in the future.

"Their policies really target speculation."

Mr. Pasalis points out that the Vancouver market has homes in the $3-million to $4-million range that sit empty while speculators wait for them to rise in value. The new policies will make that practice less profitable.

"It's just way more expensive to sit on those properties."

He believes speculation is more rampant in Vancouver than in Toronto at the moment, but that could change. When the B.C. government first introduced a foreign buyer's tax, for example, investors increasingly looked to Toronto. "It just pushed so much money over here."

He cautions that the pattern could be repeated if overseas buyers view Toronto as a more affordable alternative. "There's so much money and greed and people want to make money any way possible."

Meanwhile, he believes overseas investors are getting around the foreign buyers tax in the Toronto area by sending their children to school in Canada and buying a place for them to live in. "There's a lot of money flowing in through students."

Mr. Pasalis doesn't think that foreign buyers are leaving a lot of houses vacant in Toronto and other Ontario cities, but he adds that it's hard to detect how prevalent the gambit is.

He points out that towns such as Markham and Richmond Hill have attracted a lot of Asian buyers and there is the possibility that some of the houses in those towns are empty for long periods of time.

One clue Mr. Pasalis looks at is how prices in an area compare with local incomes.

In Markham, for example, the median income is $90,000 and the median price to buy a home is $1-million.

In Pickering, the median income is $100,000 while the median price for a home is $680,000.

"Who do you want your housing market to be for?" is a question that politicians need to grapple with, he says.

Statistic Canada released data showing that foreign ownership in Toronto and Vancouver are less than five per cent.
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