Lemmings get a bum rap. The cute little Arctic rodents don’t jump into the sea in a fit of mass suicide. They can swim. The problem is when they try to swim too far.
Reaching too far to buy into an overheated housing market isn’t much different.
Just take a look at Toronto. The year in residential real estate has started with a whimper – sales are down more than 35 per cent from this time last year, with average prices down about 15 per cent.
This kind of correction was predictable, but it’s still causing some people grief. Why? Because many of us, like lemmings, don’t stop and consider just how far away that distant shore might be before leaping into the water.
The warning signs were there. They always were.
Let’s look at what recent history can tell us.
Housing market steady as she goes
Take Ottawa. Average house prices were pretty flat through the 1990s, hovering in the high $140,000s. But in 1999, fueled by the telecom boom, prices started to tick up. The pace of that price appreciation only accelerated through the early 2000s — the telecom bust had little impact.
This can be attributed to a number of factors including low interest rates, increases in employment in the public sector and other areas outside high tech, some increases in salaries and changes in family makeup.
Even through the 2008-’10 recessionary period, Ottawa housing prices barely paused for breath thanks to those factors. Today, the average is around $390,000, an increase of almost 43 per cent from $273,000 in 1999.
That may be small potatoes compared to the soaring price gains seen in Toronto and Vancouver over that same period, but that’s a good thing. Ottawa has been a great example of a stable, steady market that, so far, has seen little risk of price correction.
Now let’s put that in the context of mortgage rates, looking at posted five-year rates as the benchmark.
Mortgage rates peaked around 1982 just north of 20 per cent and then dropped to half that by around 1987. In 1990, they rose again to the 14 per cent range. By 1996, they had begun to trend down.
Just as housing demand picked up steam in Ottawa in 2000, they peaked again at about eight per cent, then entered a fairly steady period of decline, ranging between about five to seven per cent.
This no doubt helped keep housing activity brisk.
Then came the 2008 recession. Stimulus measures cut rates to the five per cent-and-below range. Again, with a bullish impact on resale activity and selling prices.
Inflationary pressures squeezing Ottawa
In the past couple of years, mortgage rates have edged up a bit.
New lending rules that make it more challenging to secure a mortgage to cool those overheated markets elsewhere, appear to be having an effect. Ottawa is entering a rather freakish seller’s market for 2018, in which tight supply is leading to bidding wars and selling prices up as much as 25 and 30 per cent from the year before in some parts of the city.
This is being driven by a strong local economic outlook, light rail transit expansion and migratory flows that include people from Toronto looking for a more affordable place to live and work.
How long will this last? How extreme might it go?
Like the roller-coaster rides of Toronto and Vancouver, it’s anyone’s guess at this point. But as history tells us, market corrections do happen and price increases are not a given. Ottawa has fared well so far, but just like Toronto, nothing lasts forever.
How my grandparents got burned
I like to tell the story of my grandparents who unknowingly bought a house at the top of the market in 1920 for $10,000. When that house was sold in 1950, it fetched the same $10,000. In between were many years where, had the house been on the market, it would have sold for only a fraction of that price.
Governments have learned how to use economic levers to prevent the worst of a crash. The relative stability of Ottawa’s housing market since the ’90s, despite the telecom bust and the 2008 recession, is a great example.
However, market corrections still happen.
Always remember that to sell your house you need to find a buyer, and not just a buyer, but one with the financial ability to pay the price you want. This is not always the case. People in Toronto might be about to endure a tough lesson in this regard. Overheated markets will eventually run out of steam.
Think like a prudent investor
It’s a tough call to make right now.
Prices are down in Toronto, which is good news for buyers, but might they fall further in the near-term?
Ottawa, in many neighbourhoods, has quickly become a much more expensive city in which to buy. Is it better to buy now before prices rise further, or wait in the hope things will cool off?
As I have said before, it’s one thing to look at the housing market as an investor and quite another as a consumer looking for home in which to raise a family. One buyer is driven by fundamentals, the other by amenities and convenience.
But even consumers might be better served by looking at their home purchase through a critical lens. Buying a house can put a bit of financial stress on a family, but with central banks encouraging modest and sustained inflation, owning a house is a good thing.
Just don’t stretch yourself too far.
To discuss this or any valuation topic in the context of your property, please contact me at firstname.lastname@example.org. I am also interested in your feedback and suggestions for future articles.