Home Sales in 2014 broke all previous price records, with many types of homes up as much as 9% and more in the GTA! The number of homes sold was only marginally higher than previous years but listing inventory was at historic lows throughout most of the year which combined with high demand drove home prices to record highs. In the big picture, GTA home prices have risen steadily since 1997, other than a 7 month correction and recovery during the US Banking crisis in 2008/2009, a minor hiccup in an 18 year upward run.
In Newmarket average detached home prices were just over $200,000 in 1997. Today average detached home prices are hovering around $600,000, that’s a 200% equity growth for original owners from 1997. While the starting and stopping prices vary from town to town, the percentage home value growth of approx 200% is pretty much a constant in the GTA. How long can we keep seeing this dynamic growth?
Real estate like other commodities goes through cycles and at some point this one has to come to an end. Our Real Estate careers has spanned over 50 years and 3 cycles as either a broker or a salesperson. But we have never experienced anything quite like our current upward run and no one else in our industry has either. Our crystal ball doesn’t tell us when but there are strong warning signs, that a correction is coming.
Here are 3 key areas of concern:
First: There are currently more investors/speculators in the market than ever before, particular in the new home sector. Most of these “investors” are not end users but instead are buying new homes to become short term landlords to rent out now and sell down the road or are hoping to just straight up flip after closing and make a profit. Many of these “investors” have bought multiple units to be built and delivered over the next 2 years. They have to flip earlier purchases to get their money back out to have enough down payment to close their later purchases. This creates an oversupply as builders are building homes that otherwise wouldn’t have been built and their may or may not be enough buyers to occupy. Price is always a function of supply and demand, over-supply negatively affects price. (Current gas prices are a great example of supply and demand interactions.)
Second:Rising prices themselves, have priced many of our first time buyers out of the market with no hope to qualify even with today’s historic low interest rates. The housing market is shaped like a pyramid with the base and lower supporting levels of the pyramid being made up of 1st time buyers and 2nd time buyers. Someone has to buy their townhouses to let that home owner move up to buy the smaller detached, the owner of the smaller detached is then free to buy up themselves, etc. so the chain reaction can continue and the pyramid is supported.
Many 1st time buyers have historic high debt, with mortgages amounts close to the value of their homes, unlike older home owners; this group have very little equity in their homes. They are dependent on continued rising prices to get some breathing room. Most of these younger buyers are in the early stages of their careers and/or have lower paying jobs; they can’t afford to pay more. As a result, they are very vulnerable to any changes in the economy and often are first to be laid off in a downturn. Take away these buyers, the base of the pyramid erodes and the market starts to collapse.
Third: at some point interest rates will increase. The Bank of Canada is again hinting of an interest rate increase for this spring. This not anything new but at some point rates will rise. Even a slight interest rate increase hits both the investors and the first time buyers very hard, in a blink affordability is eroded. An interest hike could be a killer!
So what does all this scary talk mean? Is it time to sell or is it time to buy?
Your crystal ball is probably as good as ours but if you are ready to buy your first home or planning to trading up or laterally this year,in the end, it probably does not matter. So long that is; that it is going to be a long term hold and you buy an sell in the same market conditions. Remember the market is cyclic and long term, home values have always recovered and grown higher.
Who is at risk? Well if you’re speculating on that new home and hoping to flip and make money, be cautious you are taking a great risk if the market corrects.There is no way of tell what home values and the overall market will be like 1 to 2 years from now, when that new home you bought finally gets delivered. And if you having to close and resell one new home that you've already bought in order to close another with a later closing, good luck and may the force be with you!
And lastly, if you’re that empty nester thinking about downsizing this year or next, maybe now is a good time as any to cash out and bank your gain. Inventory is very much at a historically low and home prices have never been this high. Real Estate has had an incredible run and as my father used to tell me "you never go broke taking a profit. "
Should you decide that this is the year to make a real estate move, then we would recommend listing sooner rather than later before the spring inventory grows . Right now you have a strong competitive edge. Currently with very little snow, there are a lot more buyers than usual out looking. It looks like the spring market will start earlier than usually and may have already started based on the activity we are seeing. So hit the market before everyone else does and bank some retirement dollars. Let us know your thoughts.
Want to chat about what to do...give Caroline or myself a call :)
Best Regards Dave Clarke, Broker & Caroline Novinic, Salesperson