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The Housing Market is Experiencing The Perfect Storm

By Christelle Mwamba

" The housing market is experiencing a perfect storm" Oh, how things can change in a year! This time last year there was so much speculation in the Toronto real estate market. With the pandemic in full force, it was believed that the real estate market would turn negative, prices and sales would drop and the positive run we enjoyed over the last several years would cease to exist. However, the industry didn’t take into account that the pandemic would bring with it the reality of online schooling, working from home and a widespread shutdown of major metropolitan areas made popular by the “live where you work” lifestyle.

Millennials, being the largest generation since the baby boomers are the driving force behind the market and spurring the reaction to our new reality. The ability and freedom to work from home, the fear of condensed populations and “viral load” as well as the loss of major sporting/entertainment events found in major cities got this generation thinking that now is the time to make a move. Many thought that a move to the suburbs would increase their chances to find more affordable housing opportunities and interest rates were falling to unheard of rates.

This herd mentality and mass exodus has created an unexpected bull run for the real estate market. Prices have continued to go up at an unprecedented rate and interest rates have continued to remain at historic lows. This unexpected turn of events has brought about a new uneasiness about the market… affordability. How long can prices continue to go up and interest remain so low? There are two trains of thought. First, prices can’t continue to outpace wages and interest rates will rise this year and next. The other, prices will continue to go up and rates will remain low. So, which do you believe?

Let’s address prices first. As with any market, it is all about supply and demand. If there is more demand than supply, prices will remain high and if supply outpaces demand, we see prices drop. So, where are we with supply and demand for housing? We have all heard that real estate is local and that remains true. The exodus from cities to the suburbs brought with if a shift in demand. So suburban properties started to see bidding wars and homes getting offers far over the listed price. Whereas during the heat of the pandemic the cities struggled and often had to reduce their home prices. And demand for the more affordable suburbs hasn’t let up.

The housing market is experiencing a perfect storm. We have one of the largest generations at the prime home buying age and making life changes such as marrying and starting families. On the other hand, the baby boomer generation (the largest generation) is looking to downsize or move into retirement housing. Interest rates are historically low, and builders haven’t kept up with demand. We are also seeing increased demand in corporate interest of rental properties. REIT’s and corporations are buying up single family homes and “build to rent” homes in bulk as investments. For those who believe there is a housing bubble on the horizon are mistaken. The demand is too high, and supply just isn’t there. Even if we see a wave of foreclosures, it won’t be enough to quash the demand at present.

Now rates…while it is true that it is highly unlikely that rates will go down much farther, that doesn’t mean we will see a large spike. Even if rates rise to 5%, that is still historically low. However, rates could have a huge impact on affordability. As the chart below shows, if you were planning a home purchase at about $530,000 at a 3% interest rate and the rate increases to 3.5%, you just lost about $30,000 in purchasing power.

So, what does this mean? Well, a couple of things. First, if you already own a home, not looking to move and haven’t refinanced to take advantage of rates… do it now! You could end up saving hundreds of dollars on your mortgage payment every month. And best of all, we have a FREE refinance program!

Second, if you are thinking of buying but think the market will come down… well, if rates go up 1%, prices will have to come down $50,000 just to be at a break even based on price and rate mentioned above. Is that likely in the next year? Doubtful. Demand isn’t being met and it is going to take a while for the Toronto market to just reach a balanced market and even longer to reach a market that favors buyers. Finally, if you are thinking you can’t afford to buy, don’t have the down payment or can’t compete… You might be surprised!

If you are interested in buying, the first thing to do is talk to a knowledgeable mortgage agent/specialist me! I am verse in figuring out what you can afford now or if you can qualify to buy now. If you can’t, I will guide you in the steps to take to prepare and improve your financial situation for a purchase. I will help find creative ways to get you to your goal of homeownership and maybe even help you figure out that real estate investments could be a part of your future!

Real estate is never a bad investment unless you sell at the bottom, just like the stock market. However, with stocks, there is a real possibility that your investment could vanish. Real estate is tangible… you can see it, touch it and know it has actual utility. And with the stock market currently so volatile, maybe now is the time to move some assets from that market and invest in real estate. You can’t really time the market, but you can prepare for the current one. I can help you figure out how to not only prepare for homeownership but also build generational wealth through real estate investing!

Source: Christelle Mwamba

Christelle Mwamba MORTGAGE AGENT

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