I hope you have had a chance to enjoy some time with friends and family this long weekend. Thanksgiving is a tradition for our family, a time that we all get together to enjoy a great meal (too much food!). With our busy lives, I believe its necessary to have these moments to ensure we take time and connect with those who are important to us, take a purposeful pause, even if its only for a few hours, and reflect on all that we are grateful for in this amazing place we call home.
Lots to talk about this Fall as we navigate our real estate market. With the rate increase in September and a predicted sixth increase in October, we are witnessing the fastest rate adjustment in over 40 years, the fastest in recorded history. As cost of ownership is one of the key determinants of real estate values and demand, this rapid change in interest rates has created the desired affect, slowing both prices and transaction volume. That being said, it has not slowed the need for housing or ultimately increased the supply of real estate in our markets.
Today’s market has clear indicators that there is a significant need for housing. Over the past 7 months in particular, as travel resumes, immigration grows, and more people return to work, we have witnessed massive pressure on rental rates. This is a clear indication of the need/demand for housing that is brought on, in part, by the temporary pause of purchasing, due to the uncertainty of our interest rate environment combined with the lack of supply of appropriate housing stock. Back in the early 1990’s during our last major market downturn we witnessed a complete evaporation of demand, resulting in significant oversupply of housing. We not only saw home values decline, and inventory levels rose to over 8 months, the rental market also experienced almost zero price growth. Today’s market clearly reinforces the fact that our immigration policy, a lack of needed housing supply, along with the mortgage stress test requirement for existing home owners, has created a much more stable real estate market today, than previous market corrections.
The September market data from the Toronto Regional Real Estate Board illustrates the stabilization of values in our markets. The Average sale price of $1,086,000 is back in line with the ten-year trend for our market which has returned us to a healthy and sustainable level. Inventory levels continue to stay low at 2.69 months which is a further indication of stability in our region. We have now experienced three consecutive months at this average price level, indicating a foundation being formed in home values at this time. Through our analysis of interest rates versus today’s values, we can see that in many cases the price adjustments over the past 7 months have brought home values in many micro markets to affordable levels for today’s interest rate environment. That means if your monthly mortgage payment budget has not changed, you will find that even with today’s new higher mortgage rates, the adjusted home values have brought the market to a level where monthly costs are the same or less than what they would have been in February of this year. Today, one can be confident in our real estate market as the fundamentals are much more sustainable over the long term if you are considering purchasing a home or investment property (please refer to the market charts in the Signature Portal or the market update email from Jeff this week).
Whenever there is a significant change in the market environment, in this case, interest rates, we must expect change. Today changes are not unexpected, the rate of change is what is unexpected, which has naturally created uncertainty resulting in some Buyers pausing their decisions until we determine the trajectory of mortgage rates. That being said, there are early signs that confidence and certainty are returning as we have begun to see the return of multiple offers with two specific cases that I’m aware of in the past 2 weeks of 60 and 52 offers being received for two well-priced and well-marketed homes. I would suggest this clearly illustrates the significant need/demand for housing and the harsh reality that we just don’t have enough.
As we continue to navigate todays market together, we will gather and study the valuable market data we have from TRREB and Urbanation, to ensure we help our clients make the highest quality decision for their real estate needs. As we have learned with almost 6 decades of experience, it is time in the market that creates great results; patience has been profitable for real estate owners.
At the start of the year, I shared my feelings that we would face challenges in 2022. At the time I wasn’t certain of exactly what they would be, however, I knew there would be something. My recommendation was that we should just acknowledge the fact that we would face a challenge this year and not be surprised or set back by it. As entrepreneurs, this is a reality of any business, a reality that the best in any industry understand and prepare for both mentally and strategically.
Now we know what our challenge is this year, not just interest rate change, rapid interest rate change. So the question is not what is our challenge, it is, how are we going to choose to face our challenge?
We have learned that the best place to tackle a challenge is from a place of facts. There are a number of things we know about today’s market. There is significant need/demand for real estate, which by all accounts will not change as our country continues to welcome a growing number of amazing people every year. We know that supply will continue to be a challenge, as indicated by September inventory levels of 2.69 months, which is a technical Seller’s market (less than three months is Seller’s market, 3-5 months stable market, 5 + is a Buyers market). There does not seem to be a supply solution that will affect change for at least 10 years, if ever. The supply shortage helps with stabilizing prices, however, presents a challenge in finding homes for our Buyers. Our financial system is solid, with the introduction of interest rate stress tests in 2018, we are more prepared today than ever before for interest rate changes, providing stability for our homeowners and investors, likely resulting in few distressed sales. Employment levels are at record highs and incomes are rising which brings confidence and stability to our market. The change in rates has brought prices back in line with the ten year trend and a level that is much more sustainable than what we witnessed in the first quarter of 2022. We also understand that the rate moves were done purposely to manage the unprecedented time we have just come through. This is important to acknowledge as real estate has not gone out of favor, it has adjusted to the cost of ownership. These are facts that help guide our understanding of values and future market conditions, headlines are not helping our clients understand this reality.
The fact is, we have great fundamentals. The temporary business challenge we face is low transaction volume while we navigate the rapid rise of interest rates. We have learned over years of observing market changes that transaction volumes can and do decline at times for 6 to 18 months. In order to reach our goals in this type of environment, we must have a clear understanding of the market data and areas of the market that have opportunities as well as challenges. The biggest mistake we can make is disengaging, either consciously or subconsciously from the core business activities that drive success. We find that this can happen when a market slows down and this particular time is no different. In todays business environment the core activities of keeping connected to our database or geographic farm is critical, deeply understanding the market data for our micro markets is critical, ensuring we are committed to our daily activities and not just focused on the results (transactions) will absolutely be the determining factors in our success.
What we do know is that there will be consumers buying, selling, investing and leasing real estate every month. What we must determine is what core activities we will commit too, so that we participate in that market activity. From a business strategy perspective, we have observed that keeping our clients engaged will help them make better decisions. A powerful strategy is to continue to update our buyers and sellers who may have uncertainty about the market with what’s actually happening in the market. Sending active listings, followed by their sold prices keeps clients engaged, even if they are uncertain about timing. This simple yet powerful strategy will help them make better-educated decisions and avoid missing opportunities.
For our homeowners/investors, a market update CMA is incredibly valuable as most have done incredibly well with their real estate. Using the 10-year average charts, we can help those owners feel confident that, although values have changed since February, the long-term gains have been exceptional.
Our role as the professional that can deliver institutional quality advice and support, helping our clients decipher the data, has become more valued than ever before. Lets ensure we are committing to the core activities that will ensure we achieve the goals we set in January, acknowledging that we would face challenges in 2022. We have chosen to face the challenges and make the most of the opportunity our market has in store for us.
We have experienced an unprecedented time over the past 30 months that has taught us that we have the strength and resources to navigate the challenges that life presents us. I’m certain that we will face challenges because life is hard. However lets choose to be grateful for the opportunities we have in this amazing place we call home, let’s choose to be thankful for the freedom, the education, the health care, the safety of our communities, all the reasons why so many dream of coming to our place, our home, from all over the world.
If there is anything we can do to help you reach your goals, please reach out. We have the resources, the knowledge and the experience to know, with confidence, that the future looks exceptional for real estate.