Pronounced Buyers Market

You may recall the summer news letter reporting a slightly greater than 3 month supply of listings for sale in the Guelph MLS system, tipping the market every so slightly into a buyer's market. As of the end of October we have a 4.1 month supply, making the buyer's market more pronounced. The sky, however, is not falling. As you can see from Figure 1 sales for 2006 are below 2005 for most months, particularly September (down 18%). But 2005 posted some record sales volumes. So being lower than such a banner year of sales does not a catastrophe make. Houses are still selling if priced correctly and if the sellers are patient. Rare anymore is the story of selling in a matter of days. Six months is not out of the ordinary.

All this "to and fro" with slightly higher, slightly lower sales simply points to the reality that the boom market of the past 1/2 decade is sputtering, and the proverbial "normal" market is returning. This contrasts with the American housing market that is being described by some analysts as a "rapid deterioration" or "falling like a cheap roof". The US market currently has a record 7.3 month supply of listings (3.6 million homes) country wide and by some estimates is in danger of an implosion.

Lay offs in the softwood lumber industry in Quebec are blamed on the declining new housing market south of the border.

Why is it assumed that we will weather the storm better than our southern neighbours? Many market watchers feel that, because our market was not as hot as the US market (particularly Florida, California, La Vegas and parts of the East Coast), we will not have the huge whipsaw effect that is being predicted south of the border. In addition, fewer Canadians have borrowed as heavily on their home equity with variable interest rates to finance speculative investment housing purchases or consumer goods accumulation. With many Americans doing so, analysts feel that with rising interest rates south of the border many could find it impossible to service the higher monthly costs.

It is no secret that jobs, especially full time jobs, are very important to housing demand as newly employed individuals gain the financial means for owning a home. Over the last year, Guelph's economy has created over 5,000 full time jobs. This strong job growth has added to local housing demand helping to buffer the otherwise cooling trend in sales.

Predicted moderate inflation and a strong Canadian dollar will help keep Canadian interest and mortgage rates stable over the next year. Remember real estate is a long term investment. So if you want to buy, buy. If you want to sell, sell. If you want to do both, do both. The ebb and flow over the long run will be inconsequential. If you try to time the transaction to maximize profits you are speculating - the same principle asthe stock market. And that is a whole different game with a whole different set of strategies, and risks. As long as you are buying and selling in the same geographic location, do so without worry. If you are selling in Guelph and buying in Edmonton, call me. We need to talk!

CLOSE TO RECORD HIGHS

Sales of Residential properties in Guelph are not far off the record highs of the last several years. Figure 1 shows that in February we actually set an all time high for February sales. Sales, however, are only part of the equation. The number of listings is the other...and the number of listings is way up. At the end of May for example, the total number of listings in all categories (Residential, Farms, Commercial and Vacant Land) was just over 1100. The total number of sales in those same categories was 342. That means there is just over a 3 month supply of properties available. June had a similar ratio of 1063 vs. 308.

A “balanced” market, where neither the buyer nor seller has the negotiating advantage, is considered to exist when there is a 90 day supply of product available. After over 5 years of a seller's market we have tipped, ever so slightly, into a buyer's market. Prices have stopped going up, and in some cases have decreased slightly. Notice that in Figure 2 the dollar volume of sales has slipped in April and May over 2005. This could be a statistical anomaly whereby a burst of lower priced homes selling in those months pulled down the total dollar volume. Or it could be the beginning of a trend - only time will tell.

After over half a decade of little selection, buyers once again have a reasonable supply of product from which to choose. If a home is not in good condition, or is priced above the many others now available, the buyers “vote with their feet” and purchase the home that is in better condition, or priced more competitively. We in the industry see this daily as listings that have had their prices reduced flow across our computer screen. They were unable to attract a buyer at the original offering price. In addition, listing periods of 90 days is now not uncommon, something that was a rarity over the last 5 years.

The CBC recently reported that West of the Manitoba/Ontario border the market is still very hot, fuelled by high energy and commodity prices. Yet East of that line the market had cooled. Calgary, for example, had a 30 % year-on-year increase in average resale prices through March!

Is the bubble about to burst? Industry analysts say “not in Canada, but quite possibly in the US.” In Canada ouraffordability index is still in balance, except for Calgary, and to a lesser degree Vancouver/Victoria. In much of the United States, however, prices have reached levels above those supported by fundamentals.

The Unemployment rate in Canada set a 32 year low in Canada in March. That creates high levels of consumer confidence and strong demand for housing. As a buyer you have better selection than in the past half decade. As a seller realize that the market is healthy, but you need to be priced competitively. So we all need to get our heads wrapped around the fact that the market we are in is considered “normal”. What we have experienced for the last number of years has been “abnormal”.

In the end, if you want to buy a home, do so. If you want to sell a home, do so. Because real estate is a long term investment and the little nuances of today's market have little bearing on the fact that, in the long run, real estate always is a good investment, with the added benefit of being able to live in and enjoy your asset while it builds your economic nest egg.

BUYERS BUYERS EVERYWHERE

It is not news that house prices are up in Guelph over last year. Depending on what numbers you crunch, the average house price is about $240,000 to $250,000. Sales have remained strong throughout the year. Anecdotally, prices appear to have peaked in mid June and are trying to find a new floor level. Although there are still... cases of multiple offers on properties, it is less frequent, and rarely does the sale go over the asking price, as was usually the case with multiple offers this past spring. Price reductions on listings are quite common in the second half of 2005.

The rural property market around Guelph hit a wall in the past 4 - 5 months. Sticker shock with over $500,000 properties drives many buyers back to the city shaking their heads and deciding to stay put. This tendency is echoed in the higher priced cottage country markets like Muskoka. Colleagues in these markets are witnessing a definite price softening of the high end properties. Both cottage country and rural property purchases are discretionary. They are not "have to have" homes so people won't be sleeping in the rain. When the asking price breaches the half million dollar mark, it appears that psychological resistance takes hold.

From where do all the buyers come? Statistics Canada released a study in October pointing to several factors that have combined to fuel the housing boom over the last decade. Low mortgage interest is the obvious factor, but with our economy at top speed, the Bank of Canada has hit the brakes with interest rate hikes this fall. It's not clear that the other factors can alonecontinue to fuel the pace of the last few years.

Demographics is a big factor in the current housing boom. Echo boomers, children of the baby boomers born in the late 1970's to mid 1980's, are now in house buying mode. If they are not buying they are renting...pushing up rents. This in turn makes owning more affordable, compared to renting, the vicious cycle fueling the boom.

Compounding this is a growing number of old people. Moreover, the growing group of old people is healthier than their fore fathers . They are staying in their houses longer rather than renting or moving into institutional care.

The single life. We become married later than we used to. And we divorce more than we used to. Once divorced, both man and woman tend to each buy a home after exiting the matrimonial homestead. They both often havecareers and are financially more self sufficient than divorcees of previous generations. The net result of these influences is that, as a nation, we are spreading ourselves thinner than ever before. In 1961 the average home size was 3.9 people, but by 2001 it was only 2.6 people according to Statistics Canada.

Immigration has been an engine of growth in the housing market for years. New Canadians typically arrive as young families. Most aspire to own property because it was legally or financially impossible to do so in their countries of origin. Their impact on the housing market is "rapid and direct" the study says. In 2000, more than 40 % of households that had arrived in the previous 5 years lived in a home owned by a family member. With 60 percent of all immigrants settling in the GTA the effect is more profound in our region. With Guelph a defacto part of the GTA now, we are directly impacted by this phenomenon.

With the federal government announcing that they want to double the number of immigrants to Canada in an attempt to solve the severe skilled trades shortage, look for continued strong housing growth in southern Ontario. The one caveat is, of course, a potential melt down in the US economy due to unsustainable deficit spending by both government and individuals, stagflation due to energy shortages/high prices, or a run on the US dollar due to these and other economic factors.

If you are a "glass half full" kind of person, buy, buy, buy. If you are the other half of the glass, stay in cash and look for bargains if/when the market corrects.....but if it doesn't, you will have lost thousands of dollars standing on the side lines! Have I made your glass any clearer? I thought not.

PRICES ARE STILL RISING

A study of Figure 1 shows that the resale home volume for the first quarter of 2005 is slightly below 2004 and, oddly enough, is almost matched exactly with 2003 levels. The irony is that even though sales volume is down over last year, prices are still rising! The most likely explanation is two-fold: A) Even though total volume is off compared to 2004, in absolute terms it is still very strong. B) The lack of serviced building lots continues to result in supply of product still being short of demand. A quick review of Economics 101 notes would show that if supply is below demand, prices rise.

The net result is that we still have instances of competing offers and properties selling over asking price. Example: 1000 sq. ft. 2 bedroom bungalow with finished basement List: $209,900; Sell: 8 offers, $222,500.

Where is it heading? According to Canada Mortgage and Housing (CMHC) prices in Guelph are predicted to increase 8% in 2005 compared to a 5-7% across sourthern Ontario. All this talk of escalating prices could be dashed if world oil prices jump to $100 US per barrel, however. South Guelph is more and more becoming a commuter mecca.

Last fall the Guelph Mercury published a study revealing that a two car, two commuter family, both driving to Toronto to work, burns through $147,000 in 5 years of commuting! Those are after tax dollars too. Double oil prices and commuting may go out the tailpipe faster than you can say Fort McMurray Tar Sands.

The best strategy for buying a house is to... simply buy a house. If you are a first time buyer and try to time the market, you will always miss the peak or valley. The years you spend waiting for a market correction are years you are paying rent to a landlord who is taking your money to pay off his own mortgage. Those are also precious years you are NOT applying payments to your mortgage... a double whammy. Moreover, if you are trying to save a down payment, you likely cannot do so as fast as the market is appreciating. An 8% price increase on a $200,000 house in the next year means you will have to save an extra $16,000 just to pay for the price increase in that house over the year!

If you are considering an income property the same strategy holds true. Just buy a solid income property and start down the amortization curve to eventual debt free ownership. Every year you wait means the property will be more expensive and you will not have had tenants paying your mortgage for that year... the same double whammy.

Similarly, if you are thinking of upgrading, do it sooner rather than later. With an 8% price appreciation in the market, the $16,000 price increase in your $200,000 starter home means the $300,000 home you want to move up to will be $24,000 more expensive a year hence... a loss of $8,000 of equity on your part if you wait.

You've heard people say that "timing is everything." Year-to-year price increases for City of Guelph proper are about 8.2%. You can see from the Figure 1 that prices have been on a steady upward trend in this area since 1995. That year was the bottom of the only trough you will see on the graph, all the way back to 1968. In the six years from 1984 to the price peak of July 1990, we saw prices almost TRIPLE -so maybe it shouldn't have been surprising that they drifted a full 20% lower over the ensuing five years. So, timing has, indeed, meant a lot in the real estate market during the past decade and a half. WHEN you got in during this period made a significant difference in what your gain is now. But no matter when you invested, you do have a gain if you still have this or another property. That's why most people recognize that, long term, real estate is as safe an investment as you can find. And you get to live there in the meantime That's a pretty good deal.

The short term view of Guelph real estate is that the volume of sales since the first half of the year is weakening (See Figure 2). Although August's volume was up over last year, July and September's volumes were weaker.

Typically a flip flop between weaker and stronger sales means the sputtering of what has been a long upward trend in sales volume. Anecdotally, our daily printout of activity on the Multiple Listing Service for Guelph since mid June has shown as many as 5 - 10 houses currently for sale reducing their price in an attempt to effect a sale. In contrast, there were virtually no price reductions occurring in the market for the first half of the year. Moreover, the average time on the market for a house to sell has increased almost 46% since September 2003. This activity is usually indicative of a price plateau. Prices escalated markedly all spring. However, with the weakening of sales volume, the ability to add several thousand dollars relative to the last comparable sale, and receive it from a buyer, has diminished.

This waning of sales is to be expected. As predicted in my last Market Update, interest rates have indeed increased. And all indications are that the Bank of Canada is committed to continuing rate hikes as required to prevent inflation, so expect more of the same. In the short run expect homes sales to be weaker than in the past 3 - 5 years. But as the opening paragraph explains, think of real estate as a long term investment and the returns are good.

The interesting side bar to this is about new home sales. In July alone, new home prices went up an average of 6% across Canada. Builders have been experiencing large increases in input costs, and simply passed them on to the consumer in such a strong market. For example, softwood lumber has more than doubled in recent months from $210 per thousand board feet to $440! And that was before Hurricane Charlie did $15 billion in damage in Florida, a state that now has a voracious appetite for materials to rebuild! Never mind the 3 subsequent hurricanes/tropical storms. Can the market absorb more price increases as new home sales slow. Or will builders have to accept lower margins?

FIGURE 1: Average Resale Prices (Guelph & Surrounding Area) - All Property Types

FIGURE 2: City of Guelph MLS Residential Sales

WHAT A RIDE!

It may seem odd to use nautical slang to describe a real estate market, but studying Figure 1 shows that it is quite appropriate. Except for up ticks in July and September; sales for 2003 are almost identical to 2002, which were in turn marginally higher than 2001.

All three years, it must be remembered, are at or near record high levels for resale homes. Understandable given continued near record low interest rates and consumer confidence. Figure 2 shows that new home sales are at or near an all time high as well, and have been for almost half a decade.

Interest rates are on the move again, upward ever so slightly. Personally, I'd be locking in for a long time if I were a young home owner - not that I think rates are going to skyrocket. It's just that having put only 5% of their own money down as so many have of late, they likely can't handle much more interest cost in their monthly cash flow. A lot of people have left themselves no margin for error. If rates go up substantially, they'll lose their home. All the studies in the world that tout playing the floating rate game to save money over the long haul may be mathematically accurate - but financial suicide for anyone caught in the wrong part of the rate cycle. If you can hang on for the full ride over many years of up and down rates, taking a floating rate seems to payoff all right, but there are safer ways to get a thrill.

House sales volume is one thing, average price is another, after a steady run up in prices for over half a decade, it appears that a leveling is taking place now. It is too early to determine a mathematical trend of any reliability, but anecdotal evidence supports it. We have a daily printout in the industry called a "Hot Sheet". It shows the new listings, the sales, price reductions of current listings and a few other "' bits. For nearly three years it was rare to see a current listing being reduced. Since June of this year, however, we see 6 to 10 listings per day being reduced. Similarly, prior to June, we often had double the number of sales relative to new listings per day (decreasing supply, static demand results in increasing prices for you Economics 101 Graduates). The reverse is now happening. We consistently see about double the number of new listings as we do sales each day on our MLS "Hot Sheet" - hence a softening of prices.

Is this going to translate into a major correction? Not likely. It appears that we have simply leveled off for the time being, a plateau of sorts, while the market catches its breath after at least three years of break neck pace. For all concerned this appears to be a better market. Buyers can take a few days to make a decision about a house, rather than a few minutes in fear that one of the buyers lined up in the three or four cars at the curb may snap up the home before them. Sellers can better predict when to plan their sale and not have to worry that if they hang on for 6 months they could get thousands more only to find their move up house has gone up even more, thousands beyond what they can afford.

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In the first four months of 2002, the trend in rising costs per square foot has continued. With a shortage of properties for sale in all sectors, multiple offers are frequent. In many cases, disappointed buyers have to return to the treadmill of booking appointments, critiquing the layout, condition & location, then making a decision in the half hour before the next showing...

DISTRIBUTION OF SALES: In Guelph, the greatest activity is in the more modest price ranges. More sales would be occurring below $121,000, if product were available; however, there is very little for sale below this threshold. Many first time buyers are having to dig deeper into their savings or go deeper into debt. Even in the upper price ranges, there are accounts of multiple offers.

Relatively, though, Canada is still an inexpensive country in which to own a home. Analysis does reveal, however, that a higher percentage owns homes in Ireland, Spain, Italy, Australia, Britain & Belgium. The most startling variation in house price inflation over the last two decades has been in Spain with a real term increase of 124%, or about 4% per year. Closest to home, American average prices have increased 9% in the last year, with San Francisco posting annual increases of over 20% in recent years. Over the last decade, only three countries have completely missed out on a housing boom - Germany, Japan and Canada.

A closing thought to ponder: transaction taxes, legal & real estate fees cost about 8% of the average home price in Canada. In Belgium, it's 20%!

(For the full article of this excerpt & Gia's HOUSE & HOME Newsletter mailing list, email gia@withgia.com)

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