What’s Really Driving Our Real Estate Market?
PART ONE
Like you, I spend hours every week sitting in on Zoom calls and Webinars. My dreams now include, “Can you hear me?”, “You're on mute,” and wishing that one person would mute themselves so we can hear the presentation.
Some weeks you really have to sift through a lot of presentations to find a few nuggets of gold – and yesterday was one of those golden days!
We’ve written countless blog posts over the past year trying to understand our local real estate market and what is driving it.
Home Group Realty belongs to a network of Independent Brokerages called the Aventure Realty Network. This group, organized by Bernie Vogt, brings together the top independent brokerages across Canada. We meet via Zoom on a regular basis and Bernie has been able to put a number of influential people in front of our group.
Shaun Cathcart is the Chief Economist with the Canadian Real Estate Association (CREA), and yesterday was able to provide one of the most clearcut and understandable presentations on what is driving our market.
Let’s take a historical look at the market, starting with supply. We go back to 2015 and 2016, when active listings topped out around 250,000 across the country:
The roots of our current problem start in 2016 with a steady decrease in active listings, flattening out in 2018, and moving down again in 2019. Today’s levels are on par with listing levels 15 years ago.
Turning to the sales figures, the chart above shows a gentle overall increase in sales. You can see the massive drop in sales when the pandemic lockdown occurred in April and May. The rebound has been even more substantial.
The above chart shows months of inventory, defined as the number of months it would take to exhaust the supply of existing listings (available listings divided by sales). The red arrow points to the already low levels of inventory that were present just before the pandemic hit. Again, on par with conditions from 15 years ago. April and May 2020 shows the spike in inventory as the market shut down for 2 months, and a new record-low level of inventory when it reopened.
In today’s market, the continued growth in home sales is driven by a combination of historically low interest rates, steady growth in immigration, and the millennial cohort entering into the home-buying stage of their lives. A perfect storm of demand, and primarily centred in the large urban centres and surrounding areas that tend to attract those two groups.
Prices, understandably, have skyrocketed. According to CREA and the Home Price Index*, prices are up over $38,000 since June 2020.
*The MLS® Home Price Index (HPI) is the most advanced and accurate tool to gauge home price levels and trends. It consists of a set of software tools configured to provide time-related indices on residential markets of participating real estate boards in Canada.
The reality is that our current market conditions are not the result of short term impacts on the market, rather a series of long term trends and changes that have pushed real estate demand and prices up significantly, and will likely to continue in the future.
Let’s look more closely at this perfect storm:
Interest rates continue to be at historic lows, and that means more people can qualify for a mortgage and most people can afford to borrow more. The pressure on interest rates is starting to build, given the amount of money governments are willing to spend on the pandemic now and moving forward – it’s no surprise that bond rates are moving up and with them will be interest rates. Right now, 5 year mortgages are still available under 1.84%. In Part Two of this blog, we’ll take a closer look at interest rates and discuss what could happen there.
Immigration is probably not what you would expect to be driving prices. The speculation tax has driven the foreign investors and speculators out of our market for the most part. Many people conflate immigration with people seeking refugee status – at least, that’s what the news might have you think. However, the federal government has focused on attracting highly educated and technologically-literate workers and entrepreneurs. Remember that for the past 4 years, the US has been restricting immigration of all statuses. Many of those qualified and educated immigrants who have been denied access to the States have been calling Canada home in ever-increasing numbers. And these newly-landed Canadians aren’t waiting very long before buying a home. They also tend to buy in the large urban areas like Toronto and Vancouver, where they have access to the highly skilled jobs and businesses they run.
The Millennials are the third corner on this trifecta. Millennials represent the largest group of buyers for real estate since the days of the baby boomers. This cohort is aggressively entering the real estate market and the investment property market. With interest rates low and rent prices on the rise, there’s no question that a large group of young people are looking to purchase their first homes.
All three of these factors are driving demand and sales across the country, particularly in the vast majority of urban markets.
The biggest challenge, as we identified, is that there are not enough listings on the market to satisfy the demand. Even with buyers looking to move up (and selling their ‘entry level’ homes to do so), the supply just can’t keep up with the current level of demand. These homeowners have the same fears as entry level buyers – there just isn’t enough property out there to look at, and they can’t risk not having a place to live. The simple solution is to build more housing.
It likely won’t surprise you to hear that the simple solution isn’t that simple. Suffice to say new construction has fallen way behind due to the increased price and decreased availability of building materials – and then the question becomes are we building the right products to solve the demand issue? We’ll go deep down that rabbit hole in Part Three. For now, we are confident that the demand we’re dealing with in the Guelph real estate market appears to be here for the foreseeable future. This isn’t a Guelph challenge or a GTA challenge; it’s a Canada-wide issue that is going to take a lot of planning and political will to solve.
THE PAST WEEK IN THE GUELPH REAL ESTATE MARKET
Last week, the median home sold in Guelph looked like this: 3 bed, 3 bath, 1,510 sqft. It sold in just 9 days, for $645,000 – that’s $423/sqft. 36 of the 46 homes sold this week went at or above list price, with a median sales to list price ratio of 103%. Same week last year, the median home was 4 beds, 2 baths and 1,435 sqft. This home sold in 27 days for $550,000, or $384/sqft. Of the 47 homes sold in the same week last year, only 11 sold at or above list.
Enjoy the weekend and thank you for being a subscriber. Join us again next Friday for Part 2 of this series.
FEATURED PROPERTY:
9 DAWN RIDGE DRIVE
KITCHENER, ON
3 BED / 1.5 BATH / 1,374 SQ FT
A fantastic layout perfectly maximizes space in this beautiful family home. A bright & functional main floor, finished rec room in the basement, and 3 great bedrooms, including a spacious master with walk-in closet. And you’ll love the backyard – a spacious lawn, fully fenced, plus a great deck with enough space to dine, lounge and play!
Jeff Moisan (519) 760-3227
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