As I have stated previously, over the past year we have seen a real estate market that is unlike anything I have seen in my twenty years as a licensed real estate Broker. Soaring prices which are often driven by bidding wars and a general lack of housing inventory listed for sale has created a Seller’s market and this has left Buyer’s at a great disadvantage.
The southern Georgian Bay market has been like many others across Canada. Many of us have been astounded at the prices residential properties have been listed for sale at only to see those already inflated prices driven higher by willing Buyers that are prepared to outbid others in the quest to secure a property. Is this a healthy and balanced market? Absolutely not and sooner or later there will be a day of reckoning and that day may be closer than we think.
Effective June 1st, a new measure was implemented that affects the Canadian mortgage stress test. Some people no doubt see this as good news hoping that it will slow down what has been an overheated market. Buyers on the other hand may view this as yet a further impediment that impacts their dream of purchasing a home while some may view the new requirements with a simple question, why do we need this?
In recent months there has been a growing concern that some home Buyers may be stretching their mortgage budgets to the limit and I for one believe this is true. Low mortgage rates have allowed and perhaps even encouraged Canadian consumers to (a) buy more house than they need and (b) buy more house that they can realistically afford. With record low mortgage rates and in many cases both husbands and wives working, it’s becomes very easy to take the attitude “what’s another one hundred or two hundred thousand when money is so cheap?” I remember purchasing my first home in 1984. It was a new house priced at $85,000. My stomach churned for days as I asked myself “what have I done” and “how am I going to pay for this?”
Whether you like them or not, the new rules will provide a number of safeguards. They will reduce the buying power for some home Buyers forcing them to re-evaluate their budgets. They will protect people in the event that interest rates go up and eventually they will. The new rules will hopefully cool off the crazy market we have seen which will level the playing field for both Buyers and Sellers as we move into more balanced market conditions overall.
Here is an example of how the new stress test will impact Buyers. If you qualified for $500,000 under the current minimum qualifying rate of 4.79 per cent, that amount is reduced to $479,000 under the new qualifying rate of 5.25 per cent. It’s very easy to look at that this example which reflects just a $21,000 drop in the amount of a mortgage and ask “what’s the big deal” but there are other things to consider.
While the overall concern here may be focused on mortgage debt there are also other issues. We are still very much in a serious pandemic which has impacted the global economy. Having never been through this before we do not know what the long term effect it is going to have on the Canadian as well as other country’s economies. People also need to ask themselves what if their spouse was to get ill or lose their job? Can their partner afford to handle the burden of their mortgage debt alone? Most Canadians also have other debt ie: car loans or leases, credit card debt, lines of credit etc. All of these add up to debit obligations that must be met typically on a monthly basis.
Even with the new rules, there have been some signs the housing market is starting to slow down. The Canadian Real Estate Association reported the number of homes changing hands fell 12 per cent from March to April. For anyone that know me or follows this blog, you know that I watch the market very closely and I publish monthly market reports on my website. As of this post, there have been 18 price reductions posted on our local MLS® System in the past seven days. With many properties having sold for over their respective list prices during the past year, price reductions have been a rare commodity. For weeks I have been saying that the market we have experienced since the start of the pandemic is neither healthy nor is it sustainable. Those that argue against me simply don’t watch the numbers the way that I do.
Even if the real estate market does slow down, many are not expecting huge price drops but the fact is nobody knows what the next six months or one to two years may bring. Noted Canadian economist David Rosenberg says that globally, we are probably looking at a five year economic recovery stemming from this pandemic. Economic recessions have slowed the real estate market in the past including reductions in pricing, who’s to say that can’t happen again?
Recently I read a well known book “The Tipping Point” by Malcolm Gladwell. In this book the author both explained and illustrating how little things can make a big difference. With price reductions on the MLS® System now starting to reappear and multiple offers starting to diminish, it tells me that we are past the “tipping point” in the crazy overheated real estate market we’ve seen in 2020 and first half of 2021.
As always, please feel free to Contact Me if you have any questions, comments or are looking for some counsel with respect to you real estate needs or goals. My advice is always free and without obligation.