MYTH BUSTING TODAY’S REAL ESTATE MARKET
One of the things I love about the real estate industry is that it is constantly changing, and presenting new challenges and opportunities.
For years, there has been talk about stability in our real estate market. One thing we always remind our clients is that there is a distinction between instability and change. We have had a very stable real estate market – both locally and nationally – for over 25 years. That’s not to say there hasn’t been ups and downs, but rather the market (until recently) has been generally predictable.
There have been constant changes within those past 25 years, including changing tastes, acceptance of new and different housing styles, as well as the methods of how real estate is bought and sold. 25 years ago in our local market, a condo apartment was not an acceptable option for a lot of people downsizing or looking to get into the marketplace, nor was there a lot of choice. In 2021, condominiums accounted for nearly 20% of all home sales in Guelph, and that doesn’t even include the new build market. The rules around underwriting mortgages and the number of players in the financing world have also changed considerably over the past several decades. Mortgage brokers have gone from being the source of financing when you didn’t qualify for conventional mortgages, to being the smart way to shop for the best mortgage product period. We certainly didn’t have a stress test – you either qualified or didn’t.
Constant change also leads to a lot of confusion and misunderstanding within the market. Powerful beliefs developed over time lead people to make assumptions in the market that are based on historical data that is no longer relevant or applicable.
The goal today is to explore some of the most prevalent myths in our local real estate market.
Myth #1: Put a ‘for sale’ sign on the lawn, and the house will sell itself
While we are still in a very strong market, and even at the peak a few months ago, it still took some effort and strategy to get a property sold for top dollar. There have been some properties that have lingered (and even gone off the market unsold) because sellers set unrealistic price expectations, and were unwilling to make suggested improvements to enhance the salability of the house. Overconfidence in terms of pricing or that the market will pay a premium regardless of condition will leave a lot of home sellers frustrated and blaming their agent.
Myth #2: You can’t negotiate in this market
There’s more truth to this myth when looking at the market 3-6 months ago. Much like spring weather in Canada, if you wait 5 minutes, it’ll change. This has become evident in the real estate market over the past 2 months, as we’ve witnessed a rising number of properties that are not getting multiple offers (or any offers. for that matter) at offer presentations. When you’re the only one at the table, there is the opportunity to negotiate. Don’t expect massive price concessions, but do expect to be able to insert some due diligence conditions now. In a more balanced market, the average sales price to list price ratio is closer to 95% (compared to the 110%+ numbers we’ve seen over the past few years).
Myth #3: Investors and foreign buyers are the root cause of our market problems
It’s always easy to point the blame at someone else. Investors have been present in our market for decades. We are a university town, which means there will always be investors or parents buying properties to house students attending our schools. Some of those buyers are the parents of foreign students. There hasn’t been a sudden influx of these buyers that has caused prices to skyrocket, and most investors want their investments to be cash flow positive or at the very least neutral.
Our biggest challenge in this market is an extremely low level of homes available for sale in most price points, especially the middle market. Take, for example, a move-up buyer going from a townhouse to a detached home. If those move-up sellers can’t find anything to purchase, their entry level home won’t be available. This scenario has also been true for some empty nesters looking to downsize to a smaller home. That mid-range home has been the most impacted in this market. Not many people are going to risk selling if they don’t have somewhere to go to.
Myth #4: Market conditions will improve if you just wait it out
When the pandemic hit, many expected the market to crash and prices to freefall. That obviously didn’t happen. We also know that the market won’t sustain double digit growth indefinitely. That said, even if the market stays flat or has a minimal annual increase of 5% ( which is today’s inflation rate, and the historical long term growth rate in our market), wages and savings rates have not been able to keep pace. As interest rates increase, you might be able to squeeze some additional savings because of higher rates on bonds or GICs, but mortgage rate increases will continue to outpace savings rate increases, and you will lose borrowing power at a higher rate than you could save additional down payment. Trying to time the market is an easy way to be permanently sidelined.
Myth #5: The market is going to crash
This is the biggest myth in today’s market, and there is a lot of noise in the media and social media space about an impending crash. Immigrants are qualified and ready to buy a home within their first few years, the next generation is in their peak home-buying years and have the growing incomes to afford a home, plus there is still a large part of the boomer generation that will be selling in the coming few years. This growing level of demand will temper any potential price backsliding as will the increase in interest rates.
Fundamentally, the economy is healthy and the demand in this market is end-user driven and not entirely speculation-driven much like it was in 1992 or 2007. Will our market soften? Absolutely! There’s evidence of that now. The question is: what will it look like? 2018 is the perfect example. We saw a peak in prices, multiple offers, and lots of demand. The, conditions changed, and we had a 6 month period of slow sales and moderate price decreases before the market started to move higher once again.
The key to all of this is to look at the real estate market in minimum 5 year time blocks. A long term outlook means you can bridge any low spots in the market. An example: back in the late 1980s, semi-detached homes on Cole Road went for around $75,000. Today, those semi’s have been trading at over $700K. Will it ever go back to less than $200K? Not likely. Could those prices dip below $700K this year? Probably. 5 years from today, where will that semi be priced? Odds are very good that the price will be a lot closer to $800K than $600K.
Real estate was never meant to be a short term investment. Shelter and a home first, investment secondary. Long term vision will always pay dividends.
