Market Watch

All sectors of the real estate market are pushing forward with momentum not seen since the late eighties. House prices are up, income properties prices are up, cottage country prices are up...

By looking at Figure 1, it becomes apparent that Guelph sales are up over 2001 for every month. If you recall your Economics 101 theory, if demand increases and supply stays constant, prices will increase as long as the market is insensitive to price changes. (Remember the 8:00 a.m. Friday lecture on Elasticity of Demand that you thought you would never see in the "Real World"?). Static or decreasing interest rates have been the norm of late, so affordability remains virtually constant in spite of price inflation.

Even though the average price of a bungalow in Canada has doubled since 1985 ($84,163 - $171,033), the percentage of income required to carry that home has decreased from 37% to 31% of household pre-tax income. As long as the percentage of income required to carry a home stays below 40% economists are happy...above 40%, their pencils start twitching. Witness the late 80's boom where the index spiked to 49%, driven in large part by the spike in interest rates, to rates as high as 14% for 5 year mortgages. Today, even with a run up in prices, the index is hovering around 33% -far below the threshold where warning bells start clanging. The wild card that economists find hard to quantify is the psychology of the buyer -"buyer confidence".

It is almost surreal, but in spite of a flagging U.S. economy, dot com flame outs' and massive accounting irregularities, consumers are bellying up to the bar to buy big ticket items - vehicles, houses, "white appliances", and home renovations. Have you tried to navigate your cart through a big box building supply retailer's aisle lately? So against many indicators, consumer confidence, still seems to be holding.

Residential Sector:

First time buyers continue to be driven to the market by two factors; continuing low interest rates and inflation in rental rates not seen in over 20 years. Recently departed Premier Mike Harris changed rent control legislation about 5 years ago which now frees landlords to charge what ever rent they chose once a rental unit becomes vacant. They only have to adhere to "regulated" rent increases for existing tenants. The result has been rent increases of as much as 40% in the Guelph market. With renters shell shocked at rents being charged, many are finding that they can own a starter home for very little more than what they would be paying in rent. Add to that the intangible "pride of ownership" benefits and one has a recipe for unbridled growth in both the resale and new home markets (see Figure 2).

Rental/Investment Sector:

The rental/investment sector is driven by return on investment. As noted above, landlords are allowed to boost rents, therefore net incomes. Moreover, interest rates have dropped, increasing net incomes. An added boost to this sector has been the stock market melt down. With investors losing capital hand over fist in the equity markets, many are redeeming stocks and re-deploying them into bricks and mortar. Feeding this move is a loss of confidence in the integrity of the reporting mechanisms of generally accepted accounting principles, stock exchanges, and accounting firms. Many new investors to the real estate market remark that they will have the land, bricks and mortar with a rental property to show for their hard earned investment dollars rather than worthless, or nearly worthless stock certificates in companies like Enron, Worldcom or Nortel. The exodus from equity markets is supported by the net redemptions of Calladiall mutual funds in July of $1.1 billion, the second consecutive month of redemptions exceeding the billion dollar mark, as contrasted with July 2001 which netted sales of $513 million.

Cottage Country:

For many of the same reasons noted above investors are flocking to cottage country. The Sauble Beach area has seen lake front property appreciate by 20% in the last year. Wasaga Beach waterfront property has ballooned from $1200 per foot to approximately $7000. Even the south shore of Nova Scotia has had waterfront properties appreciate by 50% year after year. Front end baby boomers are tired of having their stock portfolios dwindle month after month and, recognizing that "life is not a dress rehearsal", feel that they might as well enjoy the fruits of their labour in a recreational property rather than have it whither in the equity markets.

The "B" word:

In trade magazines and even in popular media the dreaded "bubble" word is creeping into business lexicon when discussing real estate. We all know that it took about six months to a year for it to actually pop once the "B" word crept into talk about the stock market two years ago. Even though some optimists are predicting strong markets through 2003, objective analists would suggest that even interest rates remain at current levels, too much more price inflation without significant wage increases will result in the affordability index blowing through that dreaded 40% level. It will likely not implode as the stock market has clone, but it may be slowly choked off due to decreasing affordability. Unless we have a Mid East war, then it is anybody's guess! It appears that prices are already moderating in the Guelph market. Whereas in the spring no price reductions were evident on daily MLS listing print outs, they are a fact of life now. In the $300,000 and up price range, reductions of $10,000 and $20,000 are a frequent occurrence. Some of this may be due to the fact that both Realtors and appraisers had an almost impossible job pricing homes till the spring. It is possible that the very aggressive ramping up of prices in the spring has simply hit the point of resistance (increasing elasticity for you economics grads) and we are slipping back to find the new, true, floor level. Is the air coming out of the bubble...only time will tell.