Down the Rabbit Hole We Go…

What started out as a simple post about the August sales numbers for Guelph turned out to be quite the dive down the rabbit hole. An interesting one that brings further understanding to the riddle wrapped in a mystery inside an enigma that we call: the real estate market.

At first blush: August 2024 was a good month compared to August 2023, with sales in Guelph up by 11.7% to 134 homes. More good news was that the number of homes available for sale increased 58% year-over-year to a new high of 386 homes. This is what many of us and the media had been yelling about. There’s still not enough houses on the market to satisfy demand.

And this is where we are perched precariously on the edge of the rabbit hole.

I went back to 2014 and dug in a bit. What had the market been doing long term prior to the pandemic driven peak? I was able to identify some interesting trends and managed to put a few of the puzzle pieces together. I’ll be clear, my conclusions are just a couple of the pieces that we’ll need to fully understand the real estate market, not the full puzzle.

And here we go: right down the rabbit hole!

Going back to 2014, the average number of homes sold each August in Guelph was 176. August 2024’s results are below average (the 3rd lowest results) with the previous 2 years holding the lowest results. Interesting that in 2014, August sales came in at 195 units, well above average. Contrast this with the number of homes available for sale during August.

The 11 year average is 265 homes, which makes this past August numbers of 386 homes the highest with 2014 being the second highest August with 335 homes. Over the past 11 years the ratio of homes sold to homes available for sale (sales to listings ratio) was 66.4%. Here is our first clue that our market is not performing well is the anemic 35% sales to listing ratio this year.

The simplified story is that the housing market needed more homes on the market, and then buyers would flock back to the market. August is not typically a peak month for sales. It’s summer, after all, and anyone looking to be moved prior to the school year starting has already bought. Typically August buyers are looking to be moved before the weather turns wet and miserable. Inventory levels are at all time highs and buyers are still sitting on the sidelines.

How can that be explained? Well, it’s got to be the mortgage rates!

Mortgage rates are still high compared to 2014 - there’s a 2% difference today in rates. 6.79% vs 4.79% (2014 5 year fixed term). The difference here is approximately $118 in mortgage payments per $100,000 of mortgage amount. With recent BoC rate decreases, this gap is going to narrow and is trending to the historical mean of 5% for 5 year money.

But that’s not all of it - there’s more to the story.

Of course, this led me to examine the difference in the average sales prices during this time period. In 2014, the average home sold in August with an average sale price of $333,500 compared to $777,500 for that same house in 2024. The average sales price has increased by 234% over the past 11 years! More of the pieces falling into place.

Now we come to the final factor: household income.

Wellington County residents have excellent jobs and incomes. In 2014, the median household income was $81,347, significantly higher than the Ontario median income. In 2023, the median income for Wellington County residents had increased to $93,000, a 14% increase.

Combining sales prices with median household income, we end up with another ratio called the “Price to Income” ratio (P/I ratio), which is home sales price divided by the median income. In 2014, that P/I ratio indicated that it took 4.1x the median income to purchase the average home. In 2024, that ratio is now at 7.7x median income, which makes Guelph one of the more expensive places to buy real estate in the country. Still well below Vancouver, Toronto and other major urban areas that are above 11X median income. Not much solace for our local market.

The simplistic solution is to move to more affordable areas like Saskatchewan, Manitoba, or Alberta. We are seeing some of that, which in turn is bringing our problem to those areas as demand spikes.

The long term solution? It’s going to take action on many fronts and probably just as much time as it took for us to get into this predicament to get out of it.

One of the challenges to the long term solution will be politicians who think in 4 year election cycles rather than 10, 15 and 50+ year periods, and tend to be risk averse with anything that can impact the voting public. We’re starting to see stakeholders, developers, builders, and governments starting to look at the problem. Until the profit factor affecting all the stakeholders is addressed in an equitable manner, we’ll be stalled where we are.

But don’t crawl out of this rabbit hole feeling down or discouraged! As we like to say, there are always opportunities in the market for those who are willing to roll up their sleeves, do the work, and really dig for it.

Looking for assistance in navigating through this market and all its factors? Schedule a call to confidently navigate the complexities of today’s real estate market and make the most informed decisions that you can.

Enjoy the weekend.

Paul Fitzpatrick

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