History repeats itself!

BY JAY BRIJPAUL

In 1988, I ventured into an unknown world of real estate. Things were different then. I sold my first home in October that year; a townhome in North York for $89,000. The prices were low then. Wages were less. Interest rates were at 11.75%. The market heated up and by 1989, there were multiple offers on properties. Home prices leaped skywards. There were long line-ups at every new home site. Speculation was rampant. Interest rates went up to 13.25% and the market began to retract.

Many investors, developers, builders and speculators filed for bankruptcy. There were thousands of bank sales in the GTA. Buyers were few. The tide had turned. An average home took about two months to sell after many price reductions. After a certain point, sellers were just happy to be rid of their homes. A few profited but many lost everything.

One investor understood the market and sold off his entire portfolio by mid-1989. He went against the trend; when everyone was buying, he sold. I recall back in 1992 when I represented Royal Bank to sell a home in Etobicoke. A smart investor paid $215,000 for a detached bungalow on a premium 70 feet by 150 feet lot. Last year, he built two homes on the lot, each selling for about 1.3 million dollars. Both of these investors worked smart. They went against the trend.

By 1995, the market picked up and prices started to climb slowly. Interest rates were at 7.5%  and the average home price was around $203,000. There were new home constructions everywhere and builders were competing for the business. I recall a builder who sold an entire sub-division of homes. The buyers invested only five thousand dollars of their own money and the builder financed the rest at a lower mortgage rate. With all the newly built homes, homeowners began to upgrade. By opening up more vacant land and giving developers and builders permits to build, an upward pull was created. Real estate is the engine of the economy and with all the newly built homes, more people bought and sold, and in the process, they paid more taxes. It created more jobs and more people working led to more prosperity.

In 2000, there were 58,343 homes sold compared to 39,273 in 1995. The average home price was around $243,000. Interest rates went up slightly to 7.75%. Many experts who were following the economic cycle predicted a recession, but home prices kept climbing. By 2010, over 85,000 homes changed hands and the average price shot up to around $431,000. The five-year mortgage rate dropped to 5.19%. With price escalation, many investors and speculators took a leap. New condo projects emerged with five-year closings. A small down payment was required to lock in at pre- construction prices.

In 2015, over 101,000 homes changed hands and the average price rose to around $622,000. By 2019, the average home price reached $820,000. Builders became smarter and began to build in phases, limiting their supply. Prices continued to progress. Bidding wars became the norm. With COVID-19, the five-year fixed mortgage rate dived to 2.14%. What is driving the market?

In July this year, home prices shot up by 17%. With such high unemployment rate, why is the market still perking? AirbNbis on the verge of going B. The number of condos up for lease has surged. Buyers are lining up to buy and builders are having a feast. This reminds me of 1989. The only difference is, then, the market crashed overnight. With COVID-19, many sellers have held off on putting their homes up for sale. As a result, the supply is depleted. With a limited supply of homes on the market and low interest rate, prices will continue to climb. Is this sustainable?

Homeowners who were affected by the pandemic took mortgage deferrals and must resume payment by September. Novice speculators are sponging up the supply and the crumbs are becoming gold dust. No one really knows where we are heading. Things have changed since 1989. Immigration is on the rise and money is pouring in from other countries. Many sellers are using the equity in their homes to renovate and stay. There is a proliferation of basement apartments. The average rent from such apartments is sufficient to assist in paying a four hundred-thousand-dollar mortgage.

It is time to go against the trend. The tide will change. The best time to sell is when everyone wants to buy. First time buyers should save and sit tight. Investors should off load some of their inventory. Let’s learn from 1989. Don’t get caught by following the crowd like a flock of sheep. Let’s be smart like the two investors, one who sold everything off in 1989 and the other who bought premium property in the recession. We know that a price retraction is coming, but we do not know when. Like the virus, if we are careless, we will get infected.