Toronto and Vancouver Lead Plunging Sales, is HST to Blame?

The news the last couple of days has been rife with the news of July’s plunge in housing prices and housing sales and gloomy predictions of the HSTs negative impact. Statistics released by the Canadian Real Estate Association and the Bank of Canada seem to support the dire warnings, but is the news as bad as the media would paint it?

The CREA reported that July’s housing sales dropped 30% compared to the same month last year. Vancouver and Toronto led with the lion’s share of the tumble (dropping 45% and 35% respectively), their provinces accounting for 85% of the national decline in home sales.

Some are pointing the finger at the Harmonized Sales Tax, claiming it is directly responsible for July’s limp sales volume by scaring off home buyers. HST detractors would like to point out that since the leaders of the decline, Ontario and British Columbia, also saw the HST take effect last month, then the tax must the reason for the decline in sales.

But is this really a direct case of cause and effect? Are buyers in British Columbia and Ontario really not buying because they are put off by additional taxes on new homes and real estate agent fees? It would seem the truth is more complex.

In addition to come under the HST umbrella last month, Vancouver and Toronto share another distinction in Canada – these are the two cities that saw astronomical increases in sales activity and home prices in the last several years, whose meteoric rise had economists fearing the worst: a real estate bubble about to burst, spattering catastrophe onto the country’s newly recovering economy.

So what does the decline actually mean?

Last July was a record-breaker for Canadian housing sales, up 18.2% over the year before. Vancouver’s market saw the biggest jump that month, with a 90% year-over-year increase in sales. Toronto saw a more modest, but still impressive, 28% jump.

To say we are down 35-45% this year in Toronto and Vancouver, when we were up 28% and 90% last year, doesn’t sound so awful any more.

However, if we look even further back, we can see more evidence that last month’s seeming plunge was really a much needed correction after a long, dizzying climb.

In July 2008, at the heart of the global economic crisis, Canada as a whole saw a downturn in sales and prices over the previous year. But that previous year, July 2007, marked the fourth straight record month of sales, with home prices increasing 13% over the previous year.

Toronto sales specifically increased 26% compared to 2006, while Vancouver in July 2007 saw 41% more sales than in July 2006.

In fact, the trend over the past 15 years has been a fairly steady upward trend for both cities, and for Canada as a whole.

However, the fact remains that last month, sales went down. Not terribly far down, in the grand scheme, but down nevertheless. Can we attribute this to the HST?

To answer this, we take into account the fact that the HST began to have an effect on home purchases long before it actually came into effect – in fact, as soon as it was announced as a reality. Because it was believed the HST would be a bad thing, many people jumped in early to avoid it.

This means that many people who might have bought in July, bought in May or June instead; bumping up your plans a month or two is worthwhile when there are a few thousand dollars on the line. So May and June’s figures were actually plumped up, stealing away from July’s sales.

More importantly, however, is the fact that this ‘early buying’ has been going on for more than just a couple of months, and for more reasons than just the HST. Rock-bottom mortgage interest rates had brought many eager new homebuyers into the market last year as well, inflating sales figures at a time when they might have been more modest.

The fact is, the upward trend could not last forever, and it actually was destined to end earlier than now, but for the many incentives that drew just a few more buyers into the market.

Slower sales and price corrections will do much to make homes more affordable, even when low interest rates move upward, even with additional taxes. If we look over the long term, Canadian homeowners are still sitting pretty; their homes are worth a fair bit more than they were worth a decade ago, and to ask for more is to court the true disaster: homes that no one can afford to buy or pay for.