This Spring is going to be different.
With interest rates rising and listings picking up steam, we have already seen signs of a cooling effect taking place.
But that shouldn’t give you pause as there’s lots of potential for sales in this spring market.
Here we’ll provide you with a market update, outline how the spring market differs from that of 2017, and showcase all the opportunities available for you in the coming months.
Things to Know
Rates are increasing across the board and are expected to continue through the spring market.
- Variable rate mortgages will continue to rise with each Bank of Canada (BoC) rate hike this spring – April 13th, June 1st.
- Fixed rates have already been on the rise for the past year, reaching the mid-3% range recently.
- Lenders have also started raising alternative rates but the spread is still tight.
When The Bubble Burst?
Between January 2013 and March 2017, median prices of all properties in the GTA nearly doubled from $392,000 to $765,000 (+34% YoY in March). Then, the market turned and prices fell by 18% in just four months.
What Caused The Surge?
- Population Growth? No – Toronto’s population grew at its slowest rate in over twenty years.
- Supply Issues? No – New housing completions and starts were above the ten-year average between 2015-2017.
- Consumer sentiment – Yes
The Danger of Consumer Sentiment
Buyers believed that prices had ‘nowhere to go but up’. Panic buying set in as buyers rushed into the market out of fear that if they don’t buy now, they would never be able to afford a property.
For investors, this easy money represented a potential return on investment rarely found elsewhere. Demand grew rapidly.
When investor demand grows rapidly and they buy strictly for capital appreciation, prices push higher and it creates instability should prices fall, as investors default on their mortgage debt at a higher rate than end-users.
“When we walked them through the numbers and showed them that the rent they could earn wouldn’t cover their monthly expenses and mortgage payments, most of these buyers didn’t care.
They felt it was worth losing roughly $1,000 per month on these costs because they were convinced that the $800,000 home would be worth at least $100,000 more the next year.”
What Caused The Crash?
Bubble like appreciation + Buyer Fatigue + Foreign Buyer Tax Fears = Cooling
By the end of April, new listings climbed by over 80% year-over-year.
Buyers now had many properties to choose from so there was no longer a rush to make an offer. This sudden shift put a lot of pressure on sellers who had recently purchased another property and needed to sell their own.
988 Households lost $135 Million in 135 Days.
866 failed to close after being sold.
Sellers were forced to either walk away or accept offers well below the price they were expecting, and what comparable homes recently sold for.
In March, the median price for a home peaked at $765,000 and by July it had tumbled to $626,000, an 18% decline in just four months.
How Long Did It Take For Prices To Rebound?
Prices started to flatten in June and July before correcting in 2019 even amid low sales.
Will Rate Hikes Cause A Similar Impact?
The BoC hiked its rate once in August 2017 and three times in 2018, which brought the overnight lending rate to 1.75%. But these rate hikes were not the cause of the drop in prices or sales in 2017 and 2018.
Ontario Fair Housing Plan and the Stress Test caused more impact than Rate Hikes.
“It’s clear that the largest price and sale decreases had nothing to do with the Bank of Canada’s increase schedule. Rather it was after the Ontario Fair Housing Plan in April of 2017, that prices and sales growth halted.”
Though 2018 saw the lowest number of sales, Zoocasa says it is more likely the stress test, which reduced buying power by about 20%, had more impact than the rate hikes.
Is It 2017 All Over Again?
The rate hikes this year will surely impact borrowing power but there are still a lot of people who can afford to absorb these higher rates. We anticipate that any adjustments will be temporary and will bring us back to more stabilized pricing growth.
- People will always need to buy and sell homes.
- Investors will always be looking for discount opportunities.
- It doesn’t matter if prices are $1M or $750k people still need us.
Every March, lenders start advertising their lowest rate promos, in a bid to compete and win over market share in the spring market.
This year, we’re not seeing this. Rates are rising rapidly across insured, insurable, and uninsured classifications.
What we are seeing now is normalization as the rates adjust back toward pre-pandemic levels.
March 2019: Insured 3.19% Insurable 3.22% Uninsured 3.34%
March 2022: Insured 3.59% Insurable 3.60% Uninsured 3.79%
These rate increases have already caused a cooling effect in the Toronto market this March. With fresh listings and swelling inventory soothing the fears of missing out that permeated the market in January.
Buyers are now taking a more cautious approach but there are still many ready to buy.
It’s the right time to connect with your clients to explain that now is your opportunity to get into the market.
As rates rise, we could see a shift to a buyers market in the first half of 2022.
We might also see more investors liquidating some of their underperforming assets, while others sit on the fence until rates and prices flatten and new opportunities arise.
The Good News:
- More listings
- More opportunities for owner-occupied buyers
- More sales
- More comfortable buying experience
The media clickbait headlines will continue to drive consumer sentiment.
Keep your clients informed:
- Remind them that rising mortgage rates are nothing to fear. A 5% mortgage rate is still remarkably low.
- Prices have increased a whopping 50% in 2 years, an adjustment is not a big deal.
- For those worried about rising rates impacting their budget, the stress test is designed to protect borrowers from buying what they can’t afford.
Even as rates rise and we start to see a cooling effect occur, there are still many opportunities for you in this spring market:
- Buyers who have been sitting on the sidelines unable to win a bid.
- First-time homebuyers who have been saving during this period.
- Investors who are waiting for fresh opportunities.
- Retirees stuck in limbo and those planning to downsize.
- Divorcees looking to buy out their spouse and purchase on their own.
- Parents with equity, are willing to help out their child buy a home.
- High net worth immigrants with stable income.
Finding Opportunity When…
Rates Are Increasing
Fixed rates are growing higher than 3.25% pushing the minimum qualification rate higher. This will have a direct impact on borrowing power.
- Variable rates are still low. Clients will still qualify at 5.25%
- Non-B20 compliant lenders and alternative lenders are also an option.
More Listings Hit The Market
Sellers who are trying to get ahead of a rising rate environment could flood the market with listings. It’s not all bad news.
- Ability to negotiate price and return to conditional offers.
- A more balanced process with more options for buyers.
- Option to lock-in rates by using the Pineapple pre-qualification tool.
Banks Are Becoming More Stringent
As rates rise and borrowing power reaches the max for many, banks will become more cautious in their approach. Clients especially those who are self-employed may find it more difficult to qualify with traditional A lenders.
- More opportunities for the Alternative mortgage market.
- Spread between A and B rates are still very tight.
Buyers Are Fatigued
Many buyers who lost multiple bids decided to sit it out and wait until more listings became available or the prices dropped. Those borrowers have been saving money, waiting for a more opportune time.
More listings = more opportunity.
Did you know that nearly one-third of first-time homebuyers turned to the Bank of Mom and Dad in 2021?
A record of $82,000 was gifted on average, compared with $52,000 in 2015. In Toronto, the average gift topped $130,000 and in Vancouver, it’s $180,000.
These gifts typically come from savings, equity take-outs, and reverse mortgages.
- For first-time homebuyer clients, get the parents involved to discuss gifted DP options.
- For second-time homebuyers, discuss gifted and borrowed DP, or HELOC to bridge the gap.
Everything Is More Expensive
From food to gas to everything in between rising in costs, renters and borrowers are stretched. The good news is that savings are up and lagging sectors – hospitality and tourism – are rebounding. This means that many Canadians have the means to weather temporary higher prices.
The early bird gets the worm. Help your clients plan ahead by:
- Introducing them to the Pineapple Smart Budget Tool
- Fill out our Pre-approval tool so they know how much money they need to get into the market.
- Set up a meeting with your mortgage partner to discuss strategies.
Don’t Forget To Set Expectations
“I wish I had known just how competitive it is right now.”
“You need to look at the price and add a hundred thousand to it.”
“Before we got this place there were three places we bid on. And all three times we got outbid by a lot.”
“We learned what we needed to change our expectations”
“Our budget was initially much higher than what we ended at because the one thing we didn’t know is the other expenses we would need to pay.”
Many of our clients told us that they didn’t know what they were in for when they started house hunting last year. This caused a lot of stress and frustration for everyone involved.
One of the keys to sales success is managing your clients’ expectations. If you set their expectations at the forefront, it will ensure you and your client are on the same page throughout the entire process.
Setting Home Buyer Expectations:
- Know their maximum mortgage qualification amount in advance.
- Explain the reality – you may need to look at different areas or smaller properties nearby.
- Help them take out the emotion of it. “Think of it as an investment property.”
- Explain the rate hikes and key differences between fixed vs variable rate mortgages.
- Talk about the ability to lock in rates today, even if their renewal is over 6 months out.
- Provide long-term solutions, not just short-term options.
Setting Homeowner Expectations:
- Explain the current market conditions and rate changes and how that will impact their next purchase decision.
- Understand the difference between ARM and VRM mortgages and which one is better in a rising rate environment.
- Discuss how debt consolidation can help ease the strain of rising high interest debt, especially HELOCs.
- Talk to them about financial planners and credit specialists who can help if the rate hikes start to stretch them too thin.
Questions? I’m happy to answer all of your questions and/or set up a presentation for your brokerage as well.