GENERATIONAL OPPORTUNITY OR BUBBLE?

Over the past 4+ years on this blog, we’ve studied and reported extensively on the Guelph real estate market, covering both ups and downs. While it’s mostly been a very positive growth story, lately there’s been a lot of chatter about how sustainable this market may or may not be. 

Over the past few weeks, we’ve been discussing specific tactics to navigate our current market: specifically, how to win in multiple offers. If you missed these blogs, you can read them below:

This week, we’re taking a look at how Southern Ontario real estate offers a generational opportunity. Current prices seem unimaginably high – but is this perception novel among buyers?

Then, join us next week for Part 2, where we’ll look at the counter argument – that the current market reflects a bubble story that’s going to have a messy and expensive ending. 

Whether or not you’ve been following along with our blog, you probably understand the basic situation of our current market: homes are in high demand, and slow supply. Among the factors fuelling the demand are immigration, migration, a new cohort of buyers (i.e. millennials), and of course, historically low mortgage rates.

Today, a 5 year fixed rate mortgage for $520,000 (based upon a purchase price of $650,000 with 20% down payment) is available from a low of 1.64% with payments of $2113/month, to a high of 4.79% with payments of $2962/month – a difference of $849/month.

Historically, 5 year mortgage rates have been much closer to 10%, with spikes up to 20%+ in the mid 1980s.

While we expect mortgage rates to remain low for the balance of the year and possibly into 2022, intuitively we all expect interest rates to start increasing over the coming years.  You can see from the rate illustration above what the impact a small increase in rates will have on mortgage payments.  The demand for credit, as the economy recovers from the effects of the pandemic, will continue to increase as consumers and businesses start driving more economic activity.

In our opinion, increased rates over the midterm 3-5 years will be inevitable, and with those rate increases, we will likely begin to see lower affordability and higher monthly payments.

Demand for homes in our area has been steadily growing and is not expected to decrease in the long term, as our region and our proximity to the GTA makes Guelph a destination and a significant area of growth.

The challenge, as these two graphs show, is that the supply of homes on the market has not been able to match the growth in sales – a trend we’ve seen mounting over the past decade. The pandemic has been a splash of gasoline on the fire, as thousands of people have left condo living in the GTA for detached and semi-detached homes in our region.  Even if this pandemic-driven demand were to dry up tomorrow, the organic growth in our region will continue to outstrip the current supply of resale homes and new construction. The high tech industries in our region, with their well-paying, millennial-attracting jobs will ensure demand for homes remains high.

To recap: low interest rates, strong job growth and a large demographic entering into their prime home-buying years will ensure demand remains high for the coming years. 

Five years from today, will we be looking back and wondering at the missed opportunity of getting into the real estate market when interest rates were low and prices were relatively affordable? 

As an industry insider, I’ve watched this market and corresponding prices grow over a 30 year period.  In 1988, when I first started selling homes, a 1,000 sqft semi-detached home in South Guelph (what would now be considered mid-town) could be bought for $75,000.  Today, that semi goes for over $500,000.  There have been years when prices have dropped, and yet they recover and continue to move to higher levels. 

The prices we see today may seem incredibly high when viewed with a short term lens.  Will we have the same conclusion 10-15 years from now, when we look back and see today’s prices as a relative bargain?

There are no guarantees in life, nor in real estate.  As a homeowner or someone looking to get into the market, you have to evaluate the current market with your risk tolerance and your desire to own real estate. 

Next week, we’ll look at the opposing argument: that today’s market is full of risk, and is in dangerous bubble territory.

Stay tuned, and as always, we welcome your feedback and comments. 

THE PAST WEEK IN THE GUELPH REAL ESTATE MARKET

Last week in our local market, 62 homes sold. Same week last year, we saw 47 home sales.

The median home last week was 3 bedrooms, 2 bathrooms, and 1,584 square feet. This home sold in 8 days for a median sale price was $665,250 – that translates to $449/sqft. Sellers achieved 109% of the original list price.

Same week last year, the median home was slightly smaller: 3 beds, 2 baths and 1,300 square feet. In contrast, this home sold in 10 days for $565,000 – that’s $423/sqft and 100% of the original list price.

56 of the 62 homes sold last week went at or above list price (that’s 90%). In the same week last year, 27/47 of homes sold at or above list – which is still a significant 57% of homes.

Notably, 5 homes this week sold over the $1 million mark – including one listed for $799,900.

JANUARY MARKET REPORT

We’ve released our January 2021 Market Report. This comprehensive report breaks down sales activity in Guelph by home type and neighbourhood, plus detailed reports for Kitchener, Waterloo, Cambridge and our surrounding townships.

Click below to view and download the report, and as always, reach out to us if you have specific questions or you’d like to know more about a certain area.

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