September 02, 2022

Market Crash and what’s really happening in Real Estate

August is over and you can expect the headlines and twitter-sphere to be screaming that the market is crashing.

August home sales in the city of Guelph are down 34.9% from August of 2021. That’s a rather large percentage. The numbers, 110 homes sold in the city this past August versus 169 last year. The 10 year average sales per month in the City of Guelph is 174 units which means we are 36.8% below the historical average number.

These numbers support the headline, especially when you look at the graph below!

What’s really interesting and is contrary to the headlines is that the market is shifting back to the historic averages. Looking back over 10 years there are two points where sales outpace the number of listings, March 2016 to March of 2017, and again April 2020 to April of 2022. In both cases you can see a sharp uptick in sales mirrored by a sharp decrease in listings. The downward shift is just as sharp as the increase was, yet the focus of the story seems to be on the downward story, without the perspective of what is causing things to reverse. I get it, bad news grabs attention but where is the balance that is needed in order for people to understand the market dynamics better?

In my opinion, there are 2 factors at play in this story. Home sellers have finally, albeit late to the game, started to list their properties. Inventory levels are getting closer to the average yet still under 2 months of supply which indicates that we are still in a seller’s market.

Interest rates have taken a sharp jump up over the past few months. Interest rate increases will spike sales as buyers quickly try to secure a home before their pre-approval at lower rates runs out and impacts their affordability. Both of these factors contributed to higher sales in the early parts of the year which means less buyers looking later on.

Factor in buyers and sellers that have experienced FOMO (fear of missing out) and now are afraid to commit incase prices fall further and sellers that believe they can still get prices from 6 months ago.

These are all signs of a shifting market. Not a plummeting market.

What will the Bank of Canada do next week? Likely another hefty increase on the BoC rate and trigger another round of interest rate increases. What’s likely going to mitigate some of the downward pressure that rate increases will put on house prices is that we are still well below historical levels of available homes for sale and we still have a large demographic of buyers browsing and watching the market.

I’m not convinced we’ll see massive drops in sale prices. We may still see some slow down sales numbers and I don’t see anything resembling a collapsing market like many on social media are calling for.

Over my 35 year career I’ve always coached my clients to view real estate in 5 year cycles. If you bought your home anytime prior to June of 2021, the average sale price today is still significantly higher than what you paid for your home. If you bought in the last 12 months, plan on it taking the better part of 3-5 years for the market to regain the ground recently lost. If you bought as a speculator or looking to flip something, this might be a problem. For the average homebuyer who is simply looking for a home and is thinking long term 3-5 years was likely their mindset in the first place.

All this talk of long term thinking and a lack of drama must be boring to you the reader.

I’ll take boring all day long as long as I’m holding real estate and thinking long term.

Next Friday we will have the full August stats report for you. Expect numbers like we discussed today, expect a Bank of Canada rate increase and then watch the headlines with our boring insight into what the long term market looks like.

Enjoy the last long weekend of the summer. Stay safe.

Paul

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