GENERATIONAL OPPORTUNITY OR BUBBLE?
Current prices seem unimaginably high – but is this perception novel among buyers? Last week we covered part one of the debate: are current home values the sign of an ever-growing market, or do they tell the story of an impending bubble burst? If you missed it, you can read it below:
Today we’re exploring the other side of the debate, what some are calling the great pandemic real estate bubble of 2021.
According to the Canadian Real Estate Association, between January 2020 and January 2021 the average price across Canada rose 22.8% and the Guelph market increased by 22.3%. Pretty incredible numbers, I’m sure you would agree. CREA has provided an interesting map that shows these values across the country. Our local real estate market is not operating in isolation, and in fact, similar conditions exist across most of the country. The question is, is it sustainable or are we in a bubble that, when it bursts, home owners will be in for a world of hurt.
According to Investopedia, a housing bubble, or real estate bubble, is a run-up in housing prices fuelled by demand, speculation, and exuberant spending to the point of collapse. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators pour money into the market, further driving up demand. At some point, demand decreases or stagnates; at the same time, supply increases, resulting in a sharp drop in prices – and the bubble bursts.
Admittedly, some of the conditions that are associated with a housing bubble exist in today’s real estate market, including low interest rates, high demand, and limited supply.
What the definition doesn’t include is that bubbles are often driven by deregulation and loose mortgage underwriting and qualifying. The most recent bubble in the US in the 2000’s was driven by Wall Street and the creation of mortgage-backed securities. The stories of people owning multiple homes with little or no income reflected the amount of speculation in the market, which was supported by a financial industry that had been largely deregulated.
Those conditions don’t exist in today’s real estate market. I would argue regulations have in fact been tightened because of the fear of a bubble. The relatively recent introduction of the mortgage stress test and that Canadian banks are notoriously strict in their underwriting and qualification processes are tempering this market somewhat.
We also have a market that hasn’t kept up with demand from two large home-buying demographics: the last of the boomers downsizing and looking for that perfect smaller home, and the millennial generation in their peak years for entering the real estate market.
Are the fundamentals out of whack? Do we have a large segment of the market buying on speculation?
In our local market, I would argue that speculators are not a significant factor. A combination of the foreign speculation tax, major urban areas threatening to tax vacant homes, and regulating short term rentals out of existence means there isn’t a lot of room for speculators to take advantage of the market.
Quite simply, we live in an area of high growth, both economically and population wise.
The second largest market share in the Guelph real estate market belongs to the aggregate “out of town” Realtor, the bulk of them from the GTA. These agents are not representing local buyers, but rather “import” buyers who are either priced out of the GTA market, or are cashing out to find a less expensive market to purchase in. These buyers see our local real estate market as a bargain, relative to the GTA market.
As of recent, a popular headline is that homes in our area are selling over market value. Market value is a subjective description, and one that can’t easily be defined solely by past performance or by a strict set of rules from a governing body.
By definition, market value is the highest price that a willing buyer will pay for a good or service, and the lowest price that a seller will accept for it, if both the buyer and seller have all of the relevant information concerning the purchase, and the good or service has been exposed to the market for a reasonable time.
Buyers coming from a much more expensive market are likely to pay more for a home than local buyers, because their definition of value is higher or different than many of the local buyers.
So is it a bubble or not?
It’s complicated. Is the current level of increased value in real estate sustainable? Based upon current local knowledge, I’d say no. Would I expect a massive correction, as is typical of a bursting bubble? No.
I think the fundamentals have been driving this market, and admittedly this market is getting expensive – yet I don’t believe pricing is getting “out of line”. At some point, like all asset classes, there will be a correction and the market will attempt to find balance.
The Bank of Canada has indicated they likely won’t move interest rates in the coming months. Current mortgage underwriting is strict, fair, and qualifying people on a much higher interest rate than consumers will usually get today. Demand is high across the country, and supply is low to extremely low in Southern Ontario, as well as across most parts of Canada. This to me looks more like a generational opportunity that is the result of low interest rates, a growing population, and – thanks to the pandemic – a change of viewpoint for many home buyers about quality of life and where they want to live.
That said, the current market conditions are not likely sustainable, and at some point in the future they will go through a correction and we will see the market balance out or move towards a buyer’s market. Buyers in today’s market need to understand their risk tolerance, and when making a buying decision they need to be “comfortable” with their decision and the price they pay. If their viewpoint is to be in the real estate market long term, then any temporary price decrease over the short term shouldn’t deter them from buying, as historically, real estate has over the long term (50+ years) steadily increased ahead of inflation.
In conclusion, if you are treating real estate like a stock or some other commodity to be traded, then you should be worried about our current market conditions. If you are like most of us and want to be “in” the market in order to have a home and a place to put down roots over the long term, then paying the premium to buy into the current market will be rewarded with long term value appreciation.
Real estate is like a tree. The best time to plant that tree will always be 20 years ago, the next best time is today.
Next week, we’ll do a comparison of what your real estate dollars will buy you in the GTA, Guelph, and other nearby markets.
Enjoy the weekend.
THE PAST WEEK IN THE GUELPH REAL ESTATE MARKET
Last week in our local market, 65 homes sold. Same week last year, we saw 76 home sales.
The median home last week was 3 bedrooms, 2 bathrooms, and 1,473 square feet. This home sold in 7 days for a median sale price was $703,000 – that translates to $475/sqft. Sellers achieved 111% of the original list price.
Same week last year, the median home was similarly sized, with 3 beds, 2 baths and 1,423 square feet. In contrast, this home sold in 10 days for $580,750 – that’s $383/sqft and 100% of the original list price.
Looking back on last year’s reports, we see a stark contrast between 2020 and 2019, and although there is still significant difference between 2021 and 2020 numbers, we’re beginning to see the patterns emerging in the 2020 numbers that are commonplace today – specifically, homes selling over list. 62 of the 65 homes sold last week went at or above list price (that’s 95%). In the same week last year, 52/76 of homes sold at or above list – which is still a significant 68% of homes. 13 homes sold for more than 120% of list price last week, and notably, 5 of those 13 were in the $1+ million range. What’s more, all 5 of those homes we listed below $1,000,000 and sold well above that line. One of those homes in particular, a bit of a fixer-upper though located in a much sought-after neighbourhood, sold for a whopping 140% of the listed price.
You’ll find the details of the past week’s sales in the weekly reports, and if you’re not a subscriber, sign up at the bottom of this post to receive exclusive access to this sales data.
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ROCKWOOD, ON
3+1 BED / 3.5 BATH / 1,997 SQ FT
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Contact listing agents for inquiries & showings:
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Learn more about the Home Group Realty Journey
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