May 11, 2022
It’s always been a tradition of sorts to do predictions for the new year, but after the wild and crazy ride that was the first quarter of 2022, I thought I would put together a top 10 list so to speak of what to look for as we ride out the rest of ‘22.
There are so many metaphors for the real estate market: “red hot”, “bubble going to burst”, “house poor”, “accidental millionaire”, “housing market correction”, “home buyers have yet to lose their appetite for buying, as home prices rise”, and “interest hike will/won’t cool housing market”. When we look at the last 2 years, what metaphor will economists and industry experts use to describe this home buying climate?
Will the bubble proponents finally get their time in the limelight? They have been predicting this bubble for 15 years, to no avail. Or will the laissez-faire (wait and see) crew who sit on the sidelines quietly, be forever vindicated? It’s not a matter of being right or wrong. The real estate market is like water - it finds its own level, no matter what intervention comes upon it. Is water flow ever right or wrong unless someone tinkers with it? Is water’s destruction after a quick thaw or a major storm easily quantifiable?
Don’t ask me where I heard it, but the only metaphor that has recently caught my attention talked about how raising interest rates will have little or no effect on the speeding train, which is the housing market. If you didn’t grasp one notion of the pandemic - that our homes became the center of our universe, then where were you for the last 24 months? How do you stop emotions? Our homes became our restaurant, our office, our school, our vacation, and our entertainment, etc. The sentiment that our home is our ‘domain’, where we take ownership of our own lives, will be a part of a generation’s psyche for a long time.
Follow the Money
Where are all the savings going? Last I read, there was something like over 5.4 trillion (with a ‘T’) in consumers' savings accounts (April 2021) worldwide. Does that money go into travel, consumer goods, renovations, or property acquisitions? The smart money will tell you that your only hedge against inflation is buying a piece of dirt with something on it. The Canadian Consumer Price Index (CPI) rose 109% between the first oil embargo of 1973, and 1981 mortgage rates hit 21%. Sound familiar? During that same period what do you think home prices did? They went up 146%, and told interest rate hikes, inflation, and oil prices to “eat their dust”.
Be Weary of the Weak Investor
Between 1973 and 1981 the CPI rose 109%, while rents during that period only rose by half of that (54%). Seasoned investors have always looked at capitalization rates when buying income producing real estate. As of late those investors new to the industry have used the capital appreciation to justify their purchases, with cap rates taking a back seat in their investment analysis and strategy. With residential tax assessments going higher and driving up taxes, and an increased cost of ownership for maintenance and interest rate increases, you may see your investor clients wanting to exit their investments. Pay close attention to your investor clients. Keep them informed of valuations on a regular basis.
Eyes on Inflation
Of Canadian consumers recently polled (March 11th, 2022), 80% said they were going to be focused on stretching every dollar, and 75% of the respondents said they were going to cut spending on household items and eat from local restaurants less frequently. RBC economists calculated it would cost the average Canadian household $600 per year more to fill up their tanks. Whereby 50% of respondents said they were already cutting down on using their vehicles.
It’s Award Season
We are finally watching award shows with pre-pandemic audience sizes. We are finally getting together as a company to celebrate our successes of the last year, and to pat ourselves on the back for getting through one of the biggest events (COVID-19) of uncertainty that rocked all of our worlds for different reasons. So celebrate! Don’t be like those Hollywood pundits who feel that streaming services like Netflix and Apple TV aren’t worthy of Oscar’s accolades. Great content is great content no matter if its distributed on a large screen or a small one. Also, do not underestimate the tempest inside each other as real estate colleagues, like the world witnessed just recently between Chris Rock and Will Smith at the Oscars.
Why is there so much Interest In Interest Rates?
Money has been cheap for a very long time. Many have predicted that interest rates would never go up a lot because governments are so reliant on debt, which in turn would cost all of us citizens so much more. As a matter of fact, the parliamentary budget officer has predicted that a 1% increase would balloon the public debt charges by $4.5 billion (with a ‘B’). In turn, if current rates climbed just 2.5% (which has been the leading prediction) it would cut people’s home buying power by 20%. News flash….bank of mom and dad brace yourselves! Also, be prepared for that increased short term buyer demand at lower price points, as they try to beat the interest increase clock.
Who Asked For More Inventory?
You asked for it and it miraculously appeared. Is it because we as REALTORS® begged the real estate gods to rain inventory? Or was it the Canadian home seller who wanted to take advantage of a surging market in Q1 of 2022? It was a combination of both. The perfect harmony of panic and anxiety which is the real estate market we love to hate. Be prepared for a market which will be different. We will go from motivating buyers, to consoling sellers on the fact that the market is still strong, but Q1 of 2022 was a bit of an anomaly.
Never underestimate the fortitude of the Canadian Home Buyer
Remember the world financial crisis of 2008? Canadian home sellers barely felt it - it was just noise around the world, especially in the US. The pandemic added rocket fuel to our real estate market which was beyond anyone’s expectation. Stress test??? It barely raised an eyebrow for the Canadian buyer. We REALTORS® and mortgage lenders were more affected by it emotionally then our clients. Inflation and a few interest rate increases, so what? Just like flies at a picnic, on a hot July afternoon, they are a nuisance, but not enough to ruin a day in the sunshine. We are Canadians damn it!!!! Home ownership is a sport like hockey and snow shoeing.
We’re Going Hybrid
The votes are in and they have been counted. A hybrid workplace is here to stay. You can’t put the toothpaste back in the tube, and a portion of our workforce has proved they can work from home and in their offices. It is inherent for employers to create platforms which will allow both types of work environments to co-exist. Some buyers will solidify these work relationships and continue to move to the outskirts where they have more space to work, live and play. And some will have to face the decision that they may need to get closer to their urban work centre.
Nothing Great Weather Can’t Fix
Great weather heals all wounds. As far as I’m concerned Wiarton Willie and Punxsutawney Phil do not only predict how long winter is going to be, but they also forecast how early the spring market will be upon us. There was a feeling in the air that the winds of change in our real estate market occurred in the last week of February 2022. The war in the Ukraine started on Feb 23rd and the Bank Of Canada announced a much anticipated rate hike on March 2nd. Was it coincidence or uncertainty which shifted the market slightly? Better weather is in front of us and March Break is behind us, and I have a hunch buyers are coming out and the shadow of that crazy seller’s market. Don’t get me wrong. We are not headed for a buyers market anytime soon, but we have experienced some pressure being taken out of the market and buyers are emerging out of their dens.
The Burbs Ain’t Cool Anymore?
Will there be a return to urban centres in the not so distant future? What will drive this? Employees asked to return to their offices, or higher gas prices and/or our commute becomes more expensive due to inflationary pressures. Developers are already taking some of this sentiment into account, re-creating suburban malls into lifestyle centres where we work, live and play.
Who needs a vacation?
I know I do!!!! If you got away during the March break you were one of the lucky ones. The market in Q2 will be different than in Q1 and we are already seeing months of supply doubling. That means properties will linger a little longer, and inventories will grow, and we may find ourselves sitting a little heavier in the summer. You may have to be prepared to be here this summer. Try not to plan a 30 day vacay - your buyers will be watching carefully and may pounce on a property in an instant. Furthermore, It’s time you get familiar with all the tools we developed to measure your listing's activity online. You will need this data to show your sellers that you are doing your job to get their home sold.
The Last Word
So what…I started with 10, and I came out with 12. That’s the world we live in. There is always a change lurking around the corner. We seem to exit one circumstance and flow into another. Is that a result of the 24 hour news cycle or just life on this planet? Adaptability will rule the day. Keep your ear to the ground of your clients, your market area and the global circumstances which will shape our behaviors. Remember the headlines back in December 2019? Did anyone really predict what would shape our lives over the next 90 days which followed? I’m not going to make any bold statement on how all of the above factors will shape the next 90 days, but I will commit to one prediction….buckle up….we are in for a very interesting spring market!