Eric | Jan. 15, 2020
It was a year that was supposed to be slow. There was to be a Real Estate correction. There was fear – I was cautious and worried. But instead we bought and sold 10.9% more residential Real Estate than the year before: $3.1 Billion of the stuff. Sales numbers were up 1.6% to 5,925 home sales vs 2018. And we ended the year with just 0.7 month’s worth of residential inventory.
In the last 5 years – Jan 2015 to Dec 2019 – Real Estate in KW has surged. Single detached homes increased by 81% on average and all residential Real Estate is up 69%. To add context: the 5 years prior – Jan 2010 to Dec 2014 – Single detached homes increased by 25% and all residential Real Estate was up 24%.
Is 14% to 17% price appreciation the new normal in KW? Looking at the below chart you can see the shift that happened in January 2016 that put us on this new trajectory.
Single Detached homes: 3950 UP 5.9%
Condominiums: 648 Down 7.8%
Semi-detached homes: 421 Down 0.7%
Townhouses: 1266 Down 3.7%
Single Detached homes: $614,741 UP 7.1%
Apartment Condos: $332,409 UP 9.6%
Townhouses: $409,979 UP 10%
Semi-detached homes: $439,844 UP 11%
The median of all residential Real Estate in KW rose 10.1% to $490,000
The median of all single detached homes in KW rose 8.6% to $570,000
When reviewing the data is would seem fair to say that there is a large supply shortage of residential real estate in the lower priced styles: Apartment condos, townhouses and semi-detached homes. The fact that the number of sales in these categories have fallen while prices have increased indicates this to be true. And factors: tight supply, movement of new people to KW, low interest rates, low unemployment, Company and job growth in the area, increasing student population, along with improving downtown areas drawing people, investment and restaurants are all reasons for continued strength in the KW Real Estate market.
There are of course still many threats to the global economy. Trade and US Elections and for about 5 minutes here and there a possible war with Iran being at the top of the list. Perhaps there are too many ways to calm markets and to inject liquidity (money) into anything that threatens continued expansion. Credit creates expansion and expansion allows for further credit. And Real Estate and all assets will continue to rise in value.
All indications are that the current trends will continue and we are in store for more of the same Real Estate market in KW for 2020. What does that mean for those looking to Buyer and/or Sell in 2020? It means that you can still expect to borrow money for 3% and see 10-15% appreciation on the property you buy and it means that if you sell your home you will be selling in a Seller’s market where you can expect top dollar for your home. It also means that investment properties – those that you can rent to tenants – will also keep producing; the rental market is strong, rents are increasing, and returns on your investment for these properties are very solid.
It is never too early to buy a property where a tenant will cover your monthly costs and you reap the rewards of low interest rates and property appreciation. Here is a quick example:
Purchase price: $345,000
YOUR INVESTMENT AMOUNT: $69,000
Mortgage payment: $1288/mth
Condo fees: $270/mth
Total expenses: $1728
Rent on this type of unit is about $1650/mth currently.
Total Gross income: $19,800
Total Expenses including mortgage payment: $20,700
You will be a little negative in the first year or two, but remember that any costs out of pocket will only slightly change your investment in the beginning but once your rents increase that cash flow will more than make up for it.
Here’s what happens to that investment. I’m going to use a very conservative 6.5% average property appreciation number. We could see this number at 10%+ going forward. An 80% mortgage loan ratio over 25 years at 2.87%. I’m ignoring cash flows from rents, vacancy – because there is literally none right now, and tax on positive rent income because we aren’t counting this in our numbers anyway and capital gains tax in the event of a sale because I don’t know your tax rate and because these numbers are not the result of a sale.
mortgage pay down: $41,000
ROI: 107% or an average of 21% per year on your $69,000 initial investment.
mortgage pay down: $88,000
ROI: 378% or an average of 38% per year on your $69,000 initial investment.
mortgage pay down: $276,000
ROI: 1830% or an average of 73% per year on your $69,000 initial investment.
I think Real Estate is the best investment given the returns for the risk.
Stay healthy and keep buying stuff my friends!