August 15th 2022
I was thinking the other day of the first time I ever saw the movie ‘The Wizard of Oz’. I know I am really dating myself by saying this but it was actually at the movies. I remember at the time it started out in black and white and I remember thinking ‘what is this’. There were a few black and white movies floating around back then but I didn’t want to be paying to watch one. I still remember the impact it made when the house landed down with a thump and Dorothy opened the door. Splendid colour, munchkins, yellow brick road. What a change. Dorothy looks at her little dog and says ‘We’re not in Kansas anymore Toto.’
In a way that’s how it feels with our current market situation. After two whirlwind years of unprecedented sales volumes and price increases, with people lined up to buy and ‘duking it out’ for the deal, we’ve suddenly landed with a thud in a very different place. And just like Dorothy, we’re frantically trying to find our way back.
Well, there is some good news and some bad news in the numbers just released for July. First the good news. Prices. After an incredible two year run up in prices, culminating in a gain of almost $100,000 in January alone, the market first stalled and then went into free fall. We soon lost all the gains we made in 2022, then the gains of late 2021 and now we are back pretty much where we were this time last year.
That’s a lot of gains wiped out in a very short period of time. And for people who bought in January or February of this year and went in with 90% or 95% financing, they are currently ‘under water’. (They owe more than their home is currently worth). That’s certainly unfortunate, but I think we need to keep two things in mind.
First, it really doesn’t impact these new homeowners unless they are planning to sell right away. They qualified for the mortgage and the chances are they are enjoying a very enviable interest rate on their mortgage. Current appraised value aside, nothing has really changed. They can afford the home, they can live there and enjoy it, just as they planned.
But the second thing to keep in mind is that the values will come back, and more. Much more. We’ve seen it in the downturn of 1972, the downturn of 1980 and the downturn of 1990. Homes today are worth many multiples of the values of those same homes back then. And so will the case be for us in the years ahead.
And bear in mind that it is all relative. Setting aside the incredible escalation we’ve seen in prices during the COVID era, under normal circumstances, if you bought a property and a year later it was worth exactly what you paid for it, it would be no big deal. That was not at all unusual some years. But 20% and 30% year over year increases have spoiled us and shifted our expectations. And nobody likes to lose ground.
But when will the slide end? If ever? Well, yes it will end, and that’s the good news. I believe we are finally seeing the prices begin to stabilize. Look again at the price chart over the past year. Prices from December 2021 to January 2022 went up on average $90,366, followed by another gain of $20,470 in February. Then they began to slide, culminating in a drop of $100,580 in June alone. Now for the past couple of issues of this newsletter, I’ve taken exception to these figures. I think, tracked on a daily basis and following ‘pending’ as opposed to ‘closed’ the change in prices is more accurately depicted in the graph below.
But what we see here beginning in January 2022 is a remarkable, and almost vertical increase in prices, followed by a more modest gain. Then a relatively substantial drop in prices, followed by a cataclysmic drop in May, and now a less severe drop, or flattening out of prices of late. In fact, going back to the chart, we see from June to July a drop of only $8,499. A drop none the less, but much more modest.
It’s what we really need, stability. Until we get there, buyers and sellers just don’t know where they are at or what to do. And so, they hold off. And that’s the other half of the picture. Look what’s happening to unit sales with this instability in the marketplace.
In July, we recorded a total of 395 residential units sold in the Niagara Region. That’s down 21.9% from the 506 in June and a whopping 50.6% from the 799 registered one year ago in July 2021.
As we’ve seen, the biggest contributing factor to this decline is the absence of speculators. Over the past 2 years when anyone with some money could put 20% down on a house. Rent it out to cover the loan, and in a year with 20% price appreciation, realize a profit of better than 100%, speculators were lined up to buy. In today’s climate that element has headed for the hills. But this reduction of unit sales is more than that. This is also indicative of your ‘end user’ buyer and seller sidelined because of uncertainty. That element will be restored quite soon I believe as the graph flattens out due to price stabilization.
But we are not quite back in Kansas yet. We still have interest rates to contend with. We saw what the Bank of Canada was capable of back in the early 80s as they ratcheted up rates right into the 20% range. I don’t expect that to happen again. Hopefully they learned their lesson. But they are not done yet. I expect one or two more interest hikes over the next few months and mortgages rounding out in the 6 ½% - 7 ½% range. Still great by historic norms, but not what we’ve been used to.
But once we get there, where both prices and interest rates are stable, where people know exactly what they can count on, we’ll be in a comfortable balanced market and sales activity will bounce back to normal levels. We’re not quite there yet, but at least we can see it from here.