Every where I go these days, someone has a “Keep Calm And…” bumpersticker or shirt. I guess we can recite the Keep Calm mantra for just about anything now.
And that includes our current Real Estate Market. I in no way mean to diminish the challenges being faced by some home sellers right now; nor do I in any way look casually or carelessly on the stress and financial hardship being felt by many in our current market. What has happened so quickly is devastating to alot of families in the GTA.
The Perfect Storm
Many ask me what has caused this sudden shift. I respond that it is not so sudden and no one thing can be blamed for our current market conditions. It is a cocktail of market influences that has us in one of the most uncertain real estate markets since the early 1990s. There are seven very specific contributors to this ‘perfect storm’. Having clarity to these issues allows us to recognize that shifts are normal and all markets ebb and flow with outside influences.
Massive Price Spike
A key influence to our current market is the huge price increase of homes inthe GTA in the first quarter of 2017. It used to be that a normal real estatemarket saw 3 – 5% annualized growth. This is healthy and this type of annualized price increase is what the Federal Government and the economists want to see. This allows for a stable and balanced market. In the past few years, we have seen double digit percentage growth in the price of homes that has caused a feeding frenzy of buyers and speculators. Then the 2017 market appeared and prices surged over 20% in a matter of weeks. To give this perspective, price growth was about 20% for all of 2016. So to see this type ofa price jump in such a short period of time created a shock to our market.
The first bank referenced concerns of a ‘Bubble’ in the GTA in mid-February2017. In short order, two other of the major banks hinted at bubble concerns. This was followed, in late March, by the Governor of the Bank of Canada questioning the motivation of any purchaser in the GTA given the unsustainable price surge this year. We’ve heard pronouncements of housing bubbles in the past. Canadian Business magazine, back in 2013, hinted that a price correction of 20% was imminent, yet in the intervening years, prices continued to grow substantially. It almost got to the place where the ‘Cry Wolf’ mentality prevailed and we simply stopped listening.
Cover of Canadian Business in February 2013, reporting that home prices were in decline for the long term.
This is the one most people assume caused our market to shift dramatically. In fact, I am of the opinion that the actual policies introduced had little, if anything, to do with our current conditions. For well over a month, Finance Minister Sousa and Premier Wynne talked about affordability concerns. For well over a month, the media pronounced on the front page and at every opportunity that Government action was coming. And for that month, market uncertainty began to shift and the buyer’s perception of the market became one of ‘wait and see’. Enough already with the talk. A Foreign Buyer tax was ill-informed and without evidentiary fact. Speculators and house flippers equally contributed to the rise of prices. Inventory levels, or lack thereof, contributed to the rise in prices. There is no concrete evidence that off-shore money was contributing so substantially to house prices that this was the single target in an Affordability Policy. The government created fears and uncertainty in our market for several weeks and then took a lame duck approach.
I firmly believe that one should never poke a perceived bubble. Unforeseen results will impact the market in ways never expected. And that is exactly what has happened. Several reports of late suggest that the only thing keeping the Ontario economy together was the strength of our housing market. Take that away, and you have impacts far worse than allowing a free market to sort itself out. And just this week (July 1 – 8, 2017), we in fact see that over 27% of Ontario’s economic growth is directly related to housing. You poke a bubble and it bursts somewhere unexpected. Now, millions of Ontario citizens are struggling to resolve a home purchase and a home sale; thousands of Ontario residents are losing a lot of money on sales that cannot close. All because of some political agenda by a governing party less than a year from the next election. I will call this one as I see it – electioneering at its worst. A failing party desperate for support. And their failed attempt to gain support has likely caused more hardship for millions of Ontario voters. Can you say Hydro One? Can you say Ornge Helicopter? Stay out of it Government! (Curious if the most recent Budget Surplus pronouncement from the Ontario Government factors the hundreds of millions of dollars of lost revenue from Land Transfer Tax when so many people just simply stop buying? But I digress!)
Listing Inventory Surge
As more and more homeowners saw the staggering prices that their neighbours were getting, the bandwagon exploded in size and everyone jumped on. It was time to cash in! A normal market through the second quarter would have about 2– 3 months supply of inventory of homes. Our market this year has seen inventory levels surge to 8 – 10 months supply in many communities. The buyers simply have more to chose from at the exact same time that many of the buyers are also sitting on the sidelines. The Toronto Real Estate Boards (TREB) June report states that we had 16% more homes on the market than in June of 2016. And that number mimics what we have seen since April. An imbalance of listings has shifted the law of supply and demand in favour of home buyers and we have a ton of very unmotivated home sellers resolute in seeing February/March prices.
Listings are up; sales are down. This further reinforces the dramatic shift inthe Law of Supply and Demand. This also reinforces the fact that the buyers are choosing to sit on the sidelines and watch. With so many houses on the market,and more of those sitting idle, we now find ourselves in a solid Buyer’sMarket. TREB’s June report shows a 37.3% decline in total sales. Naturally, the media jumps all over this with bold headlines – Home Sales Plunge! Many consumers see the plunge 37% and read no further. They assume prices are dropping and panic sets in. Recently, I had a conversation with a client concerned that sales were down 44% – that was in May. The assumption, on thepart of my client, was that prices were in a freefall. How many other consumers make significant decisions based on an erroneous headline rather than the actual facts of the market? In a shifted (or shifting) market, a Realtor’s time is most often invested in educating their clients to the real facts – not the alternative facts.
And this contributing factor is a no-brainer. Why would anyone buy a home when our market appears to be in freefall? And as we see a very dramatic drop in prices in some areas, one can assume we are in the midst of the biggest correction in almost 30 years. In some cases, homes are selling for 15 – 20% less than a similar home sold at the peak this year. That should be enough to set off the alarm bells. However, carefully review the traditional buy and sellprocess, add in our current market circumstances, and one may very well have the actual cause of the decline in price:
Consumer buys new home first; consumer lists current home for sale. Unfortunately, said consumer is no longer in the ‘lucky’ first quarter market; rather the ‘unlucky’ second quarter. Same consumer now finds their house sitting idle, very few showings, and no offers. The closing date on their new home is rapidly approaching and they become desperate. Bank weighs in and states that home seller must have a deal in place asap or they cannot close on new home. Seller becomes even more desperate and reluctantly accepts a price considerably lower than is necessary. They MUST sell….or else.
Value is determined by a willing Buyer and a willing Seller, not under duress. So is this much lower price really the true value? Or the sale under duress value? And so the buyers have evidence of plummeting prices and this further entrenches the ‘Wait and See’ mindset. Do not misunderstand my somewhat over-simplification. There is no doubt that we are seeing prices settle back. The outrageous numbers earlier this year were just that and the sense of value was skewed dramatically. Prices did spike too high; houses were not worth the prices they were getting. So it is understandable that we see a settling down in price at this time.
The “B” lender market is also simultaneously in turmoil at this precise moment the Big Short, a film released last year, chronicled the fraud and misrepresentation of unqualified buyers to the lending pool of available funds. Allowing unqualified buyers to dilute the strength of a mortgage pool was one of the key contributors to the collapse of the US housing market. Well, we in Canada were not immune to the misrepresenting unqualified buyers to the lender. Several Mortgage Brokers selling Home Capital products came under fire a couple of years ago for fraudulently approving home buyers. This challenge to Home Capital’s integrity worked its way through the courts, and recently, investor confidence eroded and Home Capital had a run on its high yield GIC products. Investors wanted their money back immediately; and suddenly Home Capital was without capital.
Why is this a contributor to our market? The ‘major’ banks in Canada lend most of the mortgage money. This is the “A” lending market. Most full time employees with good credit scores and a proven history are considered a good risk for the “A” lender. However, our market has many first time buyers, new immigrant buyers, and a growing number of self-employed buyers. In many cases, these latter groups of buyers do not qualify for a mortgage with the big banks and they have to seek funds from elsewhere. Enter the “B” lender world – the world of sub-prime mortgages! Many homes are financed by the “B” lenders and our market, for the most part, has continued to support the demand for this type of mortgage product. However, when the largest lender suddenly has no money, the buyers are unable to get the sale under-written. Home Capital had more money than the other four major “B” lenders combined. So if the sub-prime world suddenly has a shortage of available cash, more and more buyers are not approved for mortgages. This lack of funding is a big contributor to our current market woes.
The good news is that Home Capital has been able to shore up financial support– the most recent being mega-investor Warren Buffett and his Berkshire-Hathaway’s substantial injection of new money. The investors are pouring back in to buy Home Capital stock. Investor confidence is coming back, and it is only a matter of time (and likely a quarter or two of a well behaved Home Capital) that the GIC money will come back to the Mortgage market with the same confidence.
Challenges come and go in any market. The reality is there is no such thing as a bad housing market. It is merely a Seller’s Market; a Buyer’s Market; or a Balanced Market. To fully understand how best to plan your move, give us a call. We would be happy to chat more specifically about your goals and how to interpret the market at the precise time you are ready to buy or sell. There is a calm in the storm of our current economic and social contributors to the housing market. Navigating those storms is just one part of what our Team can do to assist you and your family. So Keep Calm… and give us a call.