This photo is what I got when I Googled “Confused Homeowner” and I think it’s hilarious.
The current real estate market is quite different from anything that I have seen since I became licensed in 2017, the sharp decline in prices and sales activity quite unlike anything that anyone has seen in recent history. Why is that?
Interest rates… duh. It has to be interest rates, what else could it be? The Bank of Canada raised interest rates a record 8 times in less than a year bringing the overnight interest rate from .25% in early 2022 to 4.5% at present. That’s a pretty big change in a short time span and is actually quite high compared to where that rate has sat over the past 10 years. That has to be the reason!
If we are talking about the current prices, yes you are correct. Bingo, bang on. I’ve been a big proponent of the fact that prices have fallen almost in sync with the rise in interest rates. The key thing to understand is how those two things combine to create something that we are all familiar with: a mortgage payment. As the average price of a home has gone down and interest rates have gone up, the monthly cost of owning that home hasn’t changed much. In fact, affordability right now is better than it was a year ago when you consider that banks have made their 5 year rates quite attractive at present. (There’s a reason for this that we will tough on later).
And I reject the idea that people don’t want to own mortgages at these rates that are historically attractive and only last for 5 years typically, whereas you own your home for, likely, a longer time period. You’re not locked into a rate that could end up going down in the next 18-24 months, you can refinance that loan, select a shorter term or any number of things to adapt to these rates. What you can’t do is renegotiate the amount that you have paid for your home. If you put 20% down on your million dollar home, you owe $800,000 on that house and your obligation to service that debt doesn’t change. Buying that same house for $750,000 at the bottom of the market (or as close as you can get to that phenomenon) lowers your debt obligation to $600,000. Sounds like a deal to me!
This math isn’t difficult to do with countless online resources at our disposal and it makes perfect sense. So then why does everyone think the market is in such shambles and why are sales numbers so low? If A+B=C then why the negativity?
There are a few other key aspects that have been fuelling this negative sentiment and low transaction numbers over the past 6 months. And I’m not saying a full year because most of these rumblings and happenings didn’t start occurring until the summer of 2022.
Buyer sentiment essentially did a 180 degree turn from where it was a year ago and this is the number one thing affecting sales numbers. While prices are on the way up, everyone wants to buy as soon as they friggin can. And when prices are on the way down, everyone wants to wait until the perfect time to strike so that they can get the best “deal”. This is pretty easy to understand. Who wouldn’t want to buy a killer asset at the absolute rock bottom price? The correct answer to that silly question is absolutely nobody.
But what about people that already own a house? Are they then waiting to sell their house at the absolute lowest price? No, obviously. But this is where things get sticky because people want to try and time the market. If you can agree to buy a home in a softer market and then wait to sell your house in a hot market, good on you. The likelihood of this happening is hard to predict and I’m not sure that I would attempt it at the moment. But the reality is, it’s hard to focus on the fact that you are getting a good deal on your next house if you are selling your home for 25% less than your neighbour did a year ago. Homeowners are very protective and proud of their homes and they want to get tip top dollar for their own personal paradise.
Now we have less people participating in the market because they don’t want to let go of their home ”on the cheap”.
The next reason we have fewer sales is confusion. Navigating this market is very difficult because there are no guarantees on either side. At least when the market was humming along last year, you knew that your house was going to sell within 7 days and for a lot of money. That enabled you to go into the market and buy something with confidence. You lock down your future home and then set to work on selling your current one. Simple and easy to follow along when every single person in the market is doing the same thing.
Today, do you sell or buy first? Do you buy conditional on you selling your home? What is the best way forward when there are a multiple options and none of them comes with a guarantee of success? This is the confusion that I am talking about. It is just plain difficult to transact in this market. At least when homes were selling in multiple offers aka “bidding wars” it was an efficient market. What we have now is anything but.
Last but not least, add in the media commentary and the impending recession that may or may not already be happening and how does anyone expect to make a major life decision? What a tough situation to be in and to make a confident decision is almost impossible.
These are the background reasons that I think exist behind the numbers that are consistently talked about and dissected. The idea that nobody is interested in buying real estate or that the market is going to crash to 50% of today’s prices is pretty out there.
Two closing thoughts: the reason I think that banks are so heavily discounting their 5 year fixed rates right now is that they think that rates will go lower over that 5 year span and they want to lock people in at a higher rate long term.
Two, I can’t wait to see what happens to the market when the BoC holds rates flat at next month’s rate announcement. Yes that’s a prediction and I will hold myself to it. But the reason this is going to be so interesting is that sales are going to increase and prices likely will as well. Not a lot, but a little. And that is going to smash the current narrative around the market and interest rates. People want to buy homes and they are going to at a 4.5% rate.
Comments