Is The Real Estate Boom Over?

The answer to this question is, what do you mean?  The market has changed from a year ago so the frenzy and mad run-up of prices has stopped.  Having said that, certain sectors of the market are still experiencing multiple offers and sales over the asking price so the market is, in my humble opnion, different than it was and certainly more sustainable.

Now before you moan, groan or panic if you are a seller or bought recently, it’s not all bad.  It’s just different.  Seriously, do you think prices climbing by 20, 30 or 40% a year is a good thing?  I sure don’t and, let’s be honest, we all knew it wouldn’t last forever.  Nor will any downturn if that were to happen.

The Warning Signs

There are some warning signs in the economy that suggest a softening in the market but there are also recent stats in the last 2-3 weeks suggesting renewed strength. Predicting is one tough game!

• In 2017, the Toronto real estate market started the year with home prices up 34% in March over the previous year, then saw prices tumble 18% in just four months. While it has stabilized somewhat since then, year-over-year prices fell a further 6.6 per cent on average to $805,320 last month, from $862,149 in May 2017.  If what I hear is true, we may see prices coming in higher again in June and July.
• The Canadian dollar has been weakening against the U.S. dollar largely in response to the NAFTA discussions which potentially pose serious threats to both economies. About 75% of Canada’s exports go to the United States so there is no question our economy could suffer significant impacts if NAFTA is scrapped and investors are reacting to that possibility.This is a wild card.
• High domestic debt loads in Canada, brought on by a prolonged cycle of very low interest rates, are not coming down and threaten to slow the growth of the country’s economy.
• Home price-to-rent ratios are out of whack. If a home is worth more than what it can earn as a rental property, then the home is considered overvalued, and that is certainly what we’ve seen during this past period of rapid run up in prices in the last few years. It’s causing investors to pull out of the market.
• Perhaps most importantly, we should be watching the yield curve. The yield curve plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest and has long been considered one of the best indicators of an upcoming recession. An inverted curve is the rarest and the one that raises concerns. As you can see by the chart below, the last one occurred in 2007 as the economy last slid into recession and here we are again, the curve is very close to inverting again.

Our Local Market

Prices climbed too much, too fast – just as they did in 1989.  Here is a chart showing our prices in our local market and you can see we jumped way above the trendline starting in 2016.  In February 2016, the median sale price in the area was $280,605 and by March of this year, it was $400,000 – an increase of 42%.  That was simply unsustainable and a correction inevitable.

The listing inventory is rapidly climbing as sellers are getting concerned they’ve waited too long for the market peak.  Here is how the inventory has changed in our local market:

On our MLS® system, we get a little chart every time we log in and I find it valuable to watch.  For the last few years, the “sold” line typically exceeded the “New Listing” line.  Now, we’re seeing more new listings as the inventory increases and the sale-to-listing ratio is shifting away from a sellers market.  We’re also seeing price DECREASES which were almost unheard of a year ago.

What It Means For Buyers

Much of the pressure has eased on buyers giving them more time to consider what is available on the market and the hope that they may even be able to buy homes below asking prices again.  The listing inventory is climbing so choices are improving.  With fewer competing offers, the option to have home inspections and other due diligence conditions exists again (thank heavens) and generally, buying a home now is more like it was 3-5 years ago.

Interest rates are still attractive although qualifying for a mortgage has gotten harder.  That new stress test rules has reduced buying power so for those in lower price categories, the competition is stiffer.  For those in the middle priced market, there are now more options and less competition.

What buyers will start to question is where is the market headed.  Alas, the crystal ball is missing but I do know this.  If you have job security and if you can afford a home, don’t panic.  If values go down in the short term, and there is no guarantee that they will, they’ll come back up again.  If on the other hand your job is at risk or if you see a home purchase as a short-term investment, you may want to think again.  Right now, many economists feel the market will bottom out sometime between the third quarter of this year and the end of 2019.  After that, we may have a prolonged period of a flat line market; that can be a good thing as it usually suggests a balance in supply and demand.

What It Means for Sellers

If you’re thinking of downsizing to free up some cash for retirement, you might want to adjust your expectations or timelines.  Many of us have come to rely on our homes as our retirement package but if your home may not sell as easily or at the price you have been dreaming of in recent years.  Chances are you’ll still make a tidy profit on your home but you’ll need to more seriously consider your next steps.  If you are selling now or in the short term, you also need to be aggressive in pricing as fewer buyers are out there chasing more listings. Price right and make sure you do any necessary repairs and staging so you are the “best in class” against your increasing competition.  Most importantly, stop thinking of your home as your retirement nest egg but rather, an affordable place to call home.

A final word.

There are many unpredictable variables that will determine the direction ahead for both the economy and the real estate markets.  Changes to NAFTA negotiations can happen on a dime.  Interest rates might go up but they might also go down.  Real estate is a personal investment and you should be guided by your life stage and needs, your budget and your long term plans.  Cycles are just that – cycles and that means what goes up comes down and what goes down comes up.  One thing I know for sure is that in the long term, real estate always goes up. Folklore says Manhattan sold for $24.00 in 1626. Even if it was ten times that, it was a good deal.