Waiting for the market to crash before you buy?
We have some news:
The sky is not falling and the headlines indicating this are hurting people like you. Headlines touting that prices across Canada are crashing are extremely misleading. (And if you’re actively looking in the market, you already know this is not true – You may have even asked yourself why your dream home hasn’t been marked with a 30% discount stamped in red ink across the listing brochure.)
Here’s why:
While the average price of what is selling may be coming down, the value of the average home in your area is likely not. (Or at least not as drastically as the headlines would indicate). The pandemic caused the government to put a lot of money into the market. That money had to go somewhere and for many reasons, investing in real estate was the choice of savvy people around the world. Additionally, low interest rates increased the buying power of regular people. Wealthy people took advantage of these low rates as well. Financing real estate cheaply allowed them to put their cash in higher return short term investments. The result was more higher priced properties selling than in previous markets. This drove up the statistics, but while average prices of properties sold (across the whole market) rose, the value of the average property did not rise as much. In other words, more luxury homes sold in that time period, driving up the AVERAGE prices in our market.
As mentioned, Interest rates were low, giving regular people more buying power, which did cause the value of average properties to rise, but not as much. Make sense? This is exactly what happened in the Whistler Market: We can see that from 2017 to the end of the first quarter of 2022 the average SALE price of a single family home in Whistler went from $2.8 million to almost $5 million. HOWEVER, any REALTOR® in town will tell you that the value of an average home is not $5 million. That $5 million is really verging on luxury, depending on where the property is located and 2 dozen other factors. (Note: None of this means that a particular home has not come down in value since last spring. List prices are correcting from last spring and winter, but crashing is certainly not what we are experiencing. Sale prices in our markets at the time of the writing are still at levels higher than pre-pandemic).
What does that have to do with what is happening now? Well, interest rates have gone up significantly, purchasing power has been reduced, especially for regular primary residence buyers. So, those buyers, still needing a place to live, are looking at and purchasing less expensive properties. This is demonstrated in this article from the Financial Post about what is happening in Toronto: while sales of properties in the $600,000 to $1 million range have declined by 15%, sales of properties under $600,000 have increased by almost 70% from February 2022 to August 2022. This also explains some of the statistics in the RE/MAX Canada 2022 Hot Pocket Communities Report here, which shows Whistler/Pemberton prices declining 30% (!) while the number of sales increased 18+%. This is not because the value of an average Whistler home has declined 30% but rather due to the fact that people are buying MORE properties at lower price points than they were before (or people are buying less uber luxury properties – also the case, but less relevant for the average residential purchaser). (Note that the RE/MAX Canada 2022 Hot Pocket Communities Report is giving the average price across our whole market, not just single family homes and the sales of Phase II condo-hotels which are currently making good returns has influenced the average price according to this graph).
If regular Canadians have less buying power with the rising interest rates, why aren’t prices coming down like they did in 2009? Well, we are facing a very different economy than we were in 2008/09 Canadians are far less leveraged than we were in 2008/2009. With these interest rates the banks are making, well, bank. They are stable (and in Canada, with our stricter banking regulations they have always been stable. Most of our 2008/2009 decline was not in fact due to our own mortgage crisis but due to the decline in the US markets in which we were heavily vested as a nation). Unemployment is still extremely low. We are severely underbuilt, (more on this in the article from RE/MAX here), due in part to the fact that we’ve never caught up with the demand after construction slowed during the 2008/2009 downturn. Additionally, the real estate industry is currently serving 2 additional (huge) generations in the Millennials and Gen Z, while boomers and the greatest generation live in their homes longer. In short, the demand hasn’t slowed – people still need places to live, albeit, they may be looking at lower price points. Another key issue is as previously mentioned: Canadians aren’t leveraged as they were before and they are not necessarily feeling pressure to sell. Those who want to move or divest themselves of real property have probably gained a lot of equity over the past 5 years and are comfortable selling with good returns (we’ll get to this in a minute too!) Those who have purchased in the last 18 months may have seen a decline in their value from when they purchased, but real estate is typically held a lot longer. Over the long term, history indicates real estate to be a good (in fact, the best) generator of wealth.
If prices are not falling, what about interest rates? Should buyers wait for interest rates to come down before purchasing? Waiting for interest rates to come down before buying an investment or a place to live is not necessarily going to work in your favour either. Here’s why: Largely, your return is based on your cash investment into the property (your down payment), the amount you pay in principle and the amount you pay in interest over the time that you own the property, and the amount the property has appreciated over that time period.
Take a look at this article: The World’s Worst Market Timer. Keeping in mind that this is about investing in stocks, roughly the same holds true for real estate. This is how most of us buy and sell real estate: buy, live in it long term (or hold it as a long term investment, renting it and making cash flow over the time that you hold it). The other major factor that comes into play with real estate is that you can borrow money to buy it which throws in consideration of interest rates.To see how this could play out, let’s look at a hypothetical example. For the sake of simplicity, we’ve left out taxes, and other costs of owning a property. We’ve basically assumed that rent would be more than the principal payment plus those other costs.
Assume you purchased a $1 million property with 20% ($200,000) down in early 2017. Assuming appreciation according to BC Assessment Trends from 2017 until 2022, the following chart shows the average expected property increases each year from July 2017 through June 2022.
| Year | Jul 2017- Jun 2018 | Jul 2018- Jun 2019 | Jul 2019- Jun 2020 | Jul 2020- Jun 2021 | Jul 2021- Jun 2022 |
|---|---|---|---|---|---|
| % increase* | 22% | 11% | 5% | 1% (Pandemic closures Q2) | 29% (Pandemic increases) |
| Assumed value (rounded to the nearest dollar)* | $1,220,000 | $1,354,200 | $1,421,910 | $1,436,129 | $1,852,606 |
Based on interest 5 year fixed interest rates with 25 year amortisations in 2017, you would have paid off approximately $121,000 in principle and paid approximately $97,000 in interest over these 5 years. You would pull out approximately $876,606 + $200,000 initial investment AFTER paying off your mortgage. Even if we consider the worst case scenario touted by the sky is falling headlines, that ALL pandemic increases were wiped out by price declines in early 2022, AND maintain the very conservative 1% price increase in 2020-2021, you would still pull out $460,129.00 + $200,000 (initial deposit).
BUT, you say, that was at 2017 interest rates. Good point! Let’s look at TODAY’s interest rates. Even at TODAY’s Interest rates, you will pay approximately $91,000 in principle and the bank $187,000 in interest; you still come out $756,606 + $200,000 (initial deposit) ahead. AND assuming the worst case scenario of NO PANDEMIC gain, you still pull $340,129 + $200,000 (initial deposit) from the property. This amount of equity earned in our worst case scenario over 5 years ($540,000!) on $291,000 that you’ve put in over 5 years is certainly better than a kick in the pants and better than missing out on that revenue because you waited or flushed the money down your landlord’s toilet because you kept renting when you could have purchased.
In the worst of the worst case scenarios, if the property NEVER appreciates, real estate is at the very least, a forced savings account and the interest you pay is for the privilege of living in the property (still far less than rent). You are forced to pay down your mortgage. The question is thus not if or when you should buy. You should always buy when you can. The real question, as with stocks, is WHEN should you sell?
NOTE: All numbers are hypothetical and for illustrative purposes only. Each person’s situation is different and this is why you need an expert Real Estate Agent to help guide you through the best solutions for your real estate needs, whether buying or selling. Call us – we can help!
