(Bloomberg) -- Toronto’s housing fever is showing signs of cooling as price gains slowed and new listings surged in May, the first full month reflecting a new tax on foreign buyers and a crisis at mortgage lender Home Capital Group Inc.
The number of new listings soared 49 percent last month from a year earlier to 25,837, the biggest increase since 2010, according to Toronto Real Estate Board figures published Monday. The average price rose 15 percent to C$863,910 ($640,076), compared with annual gains of 25 percent in April and 33 percent in March. The benchmark price index, which measures more typical mid-priced homes, rose 29 percent, also down from a 32 percent gain in April.
Sellers may be moving to lock in price gains after the Ontario government’s April announcement of a 15 percent foreign buyer tax on the Greater Toronto Area to clamp down on speculation. Home Capital needed to refinance after a regulator accused the Toronto-based company of misleading investors about potential fraud by some brokers.
“The increase in active listings suggests that homeowners, after a protracted delay, are starting to react to the strong price growth we’ve experienced over the past year by listing their home for sale to take advantage of these equity gains,” Jason Mercer, the board’s director of market analysis, said in the report. He also said it’s unclear what the long-term effect of the new tax will be.
In Vancouver, prices have already returned to record highs after the British Columbia government announced a foreign buyers tax in July, and the federal government targeted Vancouver and Toronto with tougher mortgage rules last year. Average prices for single detached homes in the west coast city hit C$1.83 million in May, the most ever, a report on Friday showed.
Toronto’s market needed a break from the rapid price gains earlier this year, even if the impact of the buyer tax may be short lived as in Vancouver, according to Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce in Toronto.
“The acceleration in activity and prices in 2016 and early 2017 did not pass the logic test,” Tal wrote in a research note. “We believe that this adjustment will be relatively short-lived, not unlike the situation in Vancouver where activity is already rebounding.”
Toronto buyers took a step back in May as the number of sales dropped 20 percent to 10,196 units from a year earlier, the sharpest decline in four years. Prices fell by 6.2 percent in May from April on a raw basis without any adjustment for seasonal patterns.
May figures suggested a shift in demand to smaller and less expensive types of housing. Detached home sales dropped 26 percent, while for condominiums they were down just 6.4 percent. Condo prices also rose 28 percent from a year earlier, faster than the 16 percent gain for detached properties.
While the housing boom in Canada’s biggest city has been supported by job growth and rising population, the International Monetary Fund warned last week that further measures may be needed to curb the dangers from surging prices and record consumer debts. Bank of Canada Governor Stephen Poloz will probably repeat similar concerns on June 8 when he holds a press conference on his semi-annual Financial System Review. He has identified housing and consumer debt as a key vulnerability in the domestic economy.
Toronto has seen yearly price growth every month since May 2009. The last time the city saw gains of less than 10 percent was in December 2015.
The May slowdown still does little to make housing affordable for many buyers. The average year-over-year price gain amounts to an extra C$111,810 to borrow or save for a home.
The risks of such a boom were underlined by a run on Home Capital’s deposits and a plunge in its stock. Moody’s Investors Service downgraded the credit ratings of Canada’s biggest banks, citing rising household debt and runaway home prices.
Toronto’s market may still have some strength in coming months. The realtor group suggested that even with the surge in listings, the market may still favor sellers over buyers.
“At the end of May, we had less than two months of inventory,” Toronto board President Larry Cerqua said in the report. “This is why we continued to see very strong annual rates of price growth, albeit lower than the peak growth rates earlier this year.”
Houses are still selling faster than they were a year ago. The average house was on the market for 11 days in May, down from 15 days in the same month in 2016.