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Time To Panic or Take a Deep Breath

Written BY KEVIN GUEST

Buying and selling real estate is undoubtedly one of the most emotional experiences in our lives. A home provides shelter and solace from an increasingly challenging world, but what happens when our largest investment makes us question our financial security? Over the last three months the market has seen shrinking prices sending real estate consumers into panic. One must remember that the housing market is just that, a market. If you have been following the stock market you will have noticed that prices have been volatile, and the real estate market has been comparatively calm. Conditions for market success have not been favourable reacting to rising inflation. Market watchers are not overly surprised at shrinking prices because there are several explanations. First, interest rates have risen modestly and are expected to continue to rise over the next few quarters impacting affordability for some buyers. Savings must increase to offset the added cost of borrowing. Second, Ontario is facing a provincial election. Election years are typically soft for the real estate market as many are waiting to see the complexion of the new government. Third, COVID has had a great impact on prices over the last two years as consumers have kept values rising reacting to being house bound. Fourth, COVID again, people have returned to travel with numbers of travellers in Canada’s airports returning to pre-pandemic levels. Fourth, prices have finally hit a point where they are unattainable for many first-time buyers chasing a large group from the market. This is not an exhaustive set of conditions, but you can see why we have seen a downward trend in prices.

The market will need time to absorb these challenges and when the dust settles, we will likely see upward pressure on prices. There is no doubt that demand has pushed price increases, but this is only part of the issue. Interest rates have been at historical lows and in turn push home values up. Demand has been pushed by an expectation that prices will continue to skyrocket making people feel they should purchase before they are priced out. If a client qualifies for an $800 000 mortgage today and expect prices to rise by 10% during that year, the pressure is on to buy now or pay $880 000 later.

Why should you expect the market to rebound?  Although one should not expect the market to return to insane increases, recovery will occur. Eventually COVID will be in our rear-view mirror and work from home mandates will decrease. People will continue to spend money on travel and recreation in the short-term choosing to leave real estate decisions on the backburner for a while. Consumers will absorb new interest rates and return to the market. The GTA is insulated by extreme downward pressure and will remain stable compared to other Canadian markets. The writer purchased a home in 1988 when rates were 12-14% and in the first year of ownership saw the value drop. After nine years of ownership the value increased 25%, which seems modest now, making home ownership a lucrative investment. Now is not the time to consider house flipping and assignment sales on new builds because it’s unlikely you will see short-term gains that would cover the costs associated to buying and selling. Best advice, if you are entering the market, it might be time to get a good deal. Buy a home where you would like to spend a substantial number of years and your investment will pay off. The same advice stands for those who recently purchased at potentially higher prices. These buyers will benefit from locked in lower interest rates and although they may have paid a bit of a premium, values will increase over the mortgage term. Investing in real estate is never a bad move, this generation of buyers and sellers must accept new market conditions armed with the knowledge that history is on their side.

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