Knowing what part of the real estate market cycle you are in is key. (Getty Images/Dimitri Otis)
When you hear the term “buyer’s market” you intuitively know what it means: prices are dropping which is great for potential home buyers. But did you know that a “buyer’s market” and it’s opposite a “seller’s market” are terms defined by a statistical measure?
To measure market activity, real estate boards use a ratio known as the sales-to-listings ratio. As you can imagine, the ratio compares the number of sales to the number of listings in any given market. As such, this statistic is able to measure the balance between supply and demand.
Real estate cycle: Buyer’s market
In most Canadian markets, a buyer’s market occurs when the sales-to-listing ration is 35% or less (or approximately 7 sales to every 20 listings). This is a market when there are more homes for sale than there are buyers; it’s a market where prices will drop over time as home owners become more and more eager to sell their property.
Arguably, Calgary is now a buyer’s market.
Real estate cycle: Seller’s market
A seller’s market, on the other hand, occurs when the sales-to-listings ratio reaches 55% or more (or approximately three sales to every five listings). Seller’s market occur when there are a lot of qualified buyers in the market place, like when interest rates are low, and not enough homes for sale in the market. When these conditions occur, bidding wars will drive up prices as multiple offers come in on sought-after properties.
Toronto and Hamilton, Ont. have experienced seller’s markets for the last few years.
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How to calculate the sales-to-listing ratio
If you want to calculate the sales-to-listings ratio for your city or neighbourhood you’ll need only two pieces of information: the current sales for a given period and the current new listings for a given period. (If this information is not easily accessible on the real estate board’s website than call and ask. They’ll either provide you the data or send you to a real estate agent who can provide you the data.)
Let’s use metrics from the Toronto Real Estate Board (TREB) as an example.
Under TREB’s Market Watch I can access a PDF that offers details for sales and listings throughout TREB and I can see that there are 4,355 sales in January 2015 (for all areas covered by TREB) and there are 9,596 new listings. That means that, on the whole, all the areas monitored and serviced by TREB are in balanced territory in the real estate cycle. That’s because the sales-to-listings ratio (4355/9696) is just over 45%.
But drill down a little bit and I can see that Oshawa is actually experiencing a seller’s market in early 2015—with 143 sales compared to 208 new listings, or a sales-t0-listings ratio of 69%.