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2008 In Review

Negative news abounds…be it radio, television, newspapers or the internet. House sales in Toronto were off 47% in January and job losses mount. But if you dig deeper than the headlines, you will find that Guelph real estate is fairing reasonably well in comparison. Figure 1 shows that we almost matched 2007 sales until the proverbial fan got hit in the autumn with the stock market melt down. But even then, sales are off only about 14% in the last quarter, although November took a 29% hit in sales volume and January was off 25%. Moreover, 2008 residential sales of 2794 units are above those for 2003, 2004 and 2005 – 2639, 2723 and 2687 units respectively. Considering that 2002 unit sales of 1971 units was the best year in over a decade, we are still doing very, very well in the Guelph area. All is not doom and gloom when you study the data.

Average price requires closer study. Although the average price of a house in Guelph rose 3.8% from 2007, that statistic doesn’t tell the whole story. Twenty five more houses (17%) sold in the $400,000 to $500,000 range in 2008 than in 2007 while fewer houses sold in all other price categories. This alone skews the average price upwards. In addition, the real stagnation in sales didn’t occur until the last quarter of the year, so the activity of the first three quarters skews the results further. Unfortunately I don’t have access to the whole data base, nor the time available to dissect the numbers further. Suffice it to say the real story is that prices probably did not go up at all in 2008.

Is It A Good Time To Buy?

For home owners looking to upgrade their home, history has proven that buying up in a down market can put dollars in your pocket. For example if your $300,000 home drops in value by 10%, you have a paper loss of $30,000. If the house you were considering upgrading to was $500,000 and dropped by the same 10%, it would be selling for $450,000. So you pick up about $20,000 in paper value.

For those wishing to get into the market consider the following scenario. If you are renting at $1200 per month and you think you will keep doing so because house prices will come down, and you continue on this tack for 5 years (yes 5 years, because the 1990 recession saw prices slide through to 1995 until they bottomed out), you will have spent $72,000 on rent. If on the other hand you bought an average priced house today for $300,000 (the average Guelph price was $295,000 in 2008) with 5% down payment, 4.39% interest rate on a 5 year mortgage, with a 20 year payback period, your principal, interest and taxes would cost about $2000 per month. After 5 years you will have spent about $120,000 versus the $72,000 in rent. But, after those 5 years you will be ¼ the way through paying back your mortgage - or about $73,750 of the original mortgage. Remember that the first years of mortgage payments are virtually all interest, so the $73,750 of payoff calculated above is predicated on staying in that home for the full 20 years and averaging out the repayment schedule.

So roughly speaking, prices would have to drop more than 25% over five years for you to be better off financially continuing to rent. And this scenario doesn’t factor in the intrinsic value of having your own home and being able to do what you want to it, when you want, rather than having to defer to a landlord’s wishes about improvements to a property…and rent increases! Moreover, if you are wrong with your prediction of a price correction and you continue to rent, for every 5% the market goes up, you are behind not only the $14,400 in rent every year you wait, but also the $15,000 that the $300,000 home went up in year one, then the $15,750 it goes up in year two, $16,500 in year 3, and so on.

Stripping all the rhetoric and sales spin away, if you are ready and able to buy, and you wish to buy, then do so. You may pick up some money by trying to time the market. But like the stock market, you may lose significantly if you try to time the market, and miss the bottom. Buy, hold, improve and pay down. Sounds like the sage advice offered by the wise folks who lived through far tougher times than today…what is old is new again.