The pandemic, house prices and the future of real estate

BY JAY BRIJPAUL

The pandemic, house prices and the future of real estate

In December 2019, the average home sold for $819,000. One year later, in December 2020, the average home price climbed to $935,000 and two months later, in February 2021, the average home in the GTA sold for $1,045,000. Last month, the Toronto Regional Real Estate Board (TRREB) said that there were 10,970 sales, an increase of 52.5% compared to February 2020. The average price climbed by $110,000 in two months. We are in lockdown, so what is the relationship between lockdowns and real estate sales?

During lockdowns, less sellers are inclined to put their homes up for sale. This can create scarcity and lead to multiple offers. With multiple offers, the price keeps climbing. I submitted an offer on a home in Vaughan that was listed for 1.6 million. The home sold for 2.1 million. It’s a regular home, approximately 2,900 square feet but attracted 7 bidders. TRREB president, Lisa Patel, said that “It’s also evident that the supply of listings is not keeping up with demand, which could present an even larger problem once population growth picks up following widespread vaccinations later this year and into 2022.”

Immigration is on the rise. With more families settling in the GTA, prices will continue to climb. Record low interest rates add extra fuel to an already heated economy. With a low interest rate, more homes are changing hands and the government is churning much needed tax dollars to pay for COVID-19. To put this into perspective, take a look at the amount of land transfer tax the government collected from the purchase of homes in February alone. When you add other spin-offs such as HST, property tax and capital gains tax, you will understand that with higher home prices, the wheels of commerce spin faster.

TRREB Chief Market Analyst Jason Mercer commented that “In the absence of a marked uptick in inventory, the current relationship between demand and supply supports continued double-digit average home price growth this year. In addition, if we continue to see growth in condo sales outstrip growth in new condo listings in Toronto, renewed price growth in this market segment is a distinct possibility in the second half of the year.” The condo market had cooled between October to December 2020. Once lockdown was announced, supply dropped and the current condo market is on fire. First time buyers are afraid of losing out and this is creating buying frenzies, pushing prices even higher.

Remax Ontario predicts that the residential market across Ontario will remain strong for 2021 with the average home price increasing by 10% for London, 7% for Kitchener-Waterloo and Hamilton-Burlington, 12% in Niagara and 10% in Kingston, Cornwall and Thunder Bay. Many senior citizens who, in normal times, would have sold and moved to a retirement home, choose to keep their homes instead. It is estimated that this accounts for about 10% of properties up for sale in a given year. Many families, instead of moving to another home, choose to stay and use some of their equity to renovate their existing home or to invest in a second property.

With the pandemic, the wealthy benefit as we can see with companies such as Amazon. Investors with multiple residential properties can use their equities to buy up others. It is becoming increasingly difficult for first time buyers to save enough for a down payment.  In addition, many of these buyers are not qualified for a mortgage to match the current selling prices of homes. Low-income earners are caught in a rabbit hole leading towards an emerging trend where families are forced to pay rent for the rest of their lives. A word of advice—buy anything you can afford. With our government printing more money, inflation will push home prices even higher.

Currently, the number of homes on the market is increasing. This is good news because with more homes available, the demand will subside momentarily. A word of caution for buyers who bought homes that will be closing in early or late summer; It’s best to ask your lender to appraise the property as soon as possible. If prices drop by the time you are ready to close, the appraised value will be lower and the lender will lend based on the appraised value and not necessary the sold price. This can be the monkey wrench that will land a buyer into financial trouble. When shopping for interest rates, the current spread between variable and fixed rate mortgage is narrow. The fixed rate in my opinion is a better option.

This pandemic taught us that the world is small and when a butterfly flaps it wings, it becomes the wind under the wings of Toronto’s soaring house market. When it comes to real estate, the high prices today will look like a bargain tomorrow. Don’t wait for the other train.