I was booked to speak to a group of advisors at a financial institution this week to give a market update. However, I was told this was a particularly sharp group so the night before I changed up the presentation. Traditionally I am asked to deliver an answer to the two questions you all ask when you run into me; “How’s the market?” & “What do you think prices will do next year?”
Both are great questions, but I think there is a better question....
My Father was a politician and growing up he would always tell me that you could make statistics back any theory. It’s true! I shared with the group some statistics that showed our current market in a very positive light and I shared others that looked pretty gloomy. It was the same with the predictions for next year’s pricing. It was easy to find encouraging signs based on increased activity in Alberta, a market that tends to foreshadow our own. The Canadian economy is fundamentally one of the strongest in the world. However, based upon the oversupply of homes currently on the market and global unrest one could build a negative scenario. So how’s the market? What will prices do next year? If anyone can give you a story to make a case for just about any scenario, what are you to do? Ask a different question....
First, let’s look at the motivations that influence us to buy or sell property. It’s the same basic software that drives all of our behaviour. The opportunity to gain or the fear of loss. In my experience, fear of loss is a much greater motivator than opportunity to gain in the housing market. Take your mind back to 2007, how many people bought starter homes at a big price tag fearful that if they did not get on the property ‘ladder’ they may never own a property? How many stretched themselves to buy a big house fearing that if prices rose any higher it would never be attainable. Many of the same people are now down-sizing for fear of being caught in an American style housing crash.
If we set aside fear, and look beyond the market statistics we can ask. “Is there a potential opportunity in the market for me?”
We reviewed some data on house pricing for a typical starter home, an average small family home and a larger executive style home. The participants were surprised to see the drop in pricing when compared to 2007 and even last year. Because the average house price is the normally advertised statistic. With a sharp drop in sales in our area a few sales of very expensive property can impact the average price much more than it would on a larger volume. Of course, the super wealthy are buying right now; those guys don’t get rich by buying high when the market is at its peak! However, when you isolate a small sub-set of the data you can start to see a true picture of market dynamics in that area, in that sector of the market. The reality was that a starter home in the area we studied was down 47k from 2007, the mid-range home was down 37k and the executive home was down 58k. So where is the opportunity? Two things you must consider to understand the potential opportunity in this market:
- Real estate has always been a good long term investment. You need to live somewhere, and if you have an investment property someone else pays it off! History does not always predict the future, but almost always you can learn all you need to know about long term prospects by looking back.
- Money is cheap right now. I pilled the “Special Offers” from the same institution I was addressing from May 17th 2007. The four year closed rate was 5.89% and their six month open was rate was 8.3%. That same bank will give you a 3.99% four year rate today! The savings are literally tens if not hundreds of thousands over the life of a mortgage.
So what will prices do next year? If you are a first time buyer with that pricing and those rates, if you know you plan to stay in the home a while. Does it really matter that much? Most people will wait till prices are soaring again and interest rates are being hiked to slow inflation before they buy their first place. This makes no sense, but experience tells me it is true.
What about the move up market? If you can sell your own place for 47k off and buy a new one for 58k off and get a well priced loan on the difference does that make sense long term? If you are sat in a 700k house next time the market goes up 10% instead of a 500k house you just made an extra 20k! But again, most folks will wait and pay the extra 20k with a higher loan. Even if it goes down in the short term, you may want to remember over the long term Real Estate has historically always risen.
I could give many more examples. Of course this market does not offer an opportunity for everyone. Every week I advise some people to hold off on selling or buying based on their personal situation. However, it does make sense to sit down with your financial advisor at the bank, or to go have a coffee with your Realtor and instead of asking the normal questions ask them...
“Is there a potential opportunity in this market for me?”
Better to ask now than to look back and regret later, we all have a story about a market we missed. If you want to understand if this market has an opportunity for you, call your advisor today or give me a call.