Eric | Feb. 23, 2020
392 active Residential Listings at the end of January. Down 38.7% vs last year and down a whopping 63.7% compared to the 10-year average! “Hello? houses for sale – are you there?”. Inventory is so low right now, sitting at less than a month’s supply. There are very few homes on the market and the inventory that does hit is getting snapped up very quickly.
Why is supply so tight? The Decision to Sell is affected by many factors right now. Some of the questions being asked are:
Unfortunately, a lot of these questions do not yield great answers and so the decision to move gets put on the back burner or frustration at trying to align the right new residence with timing and finances cause home owner’s to stay in their home and put off any action. The biggest example is the plight of the Baby Boomer: to downsize or not to downsize? Boomers want bungalows and land. They don’t want wasted space (or space for kids to move back in) and they don’t want to see other people (they have worked hard and have fake smiled at their neighbours long enough). Looking for a home that fits the next chapter in a Boomers life is extremely difficult in our KW market where demand under $700,000 is like running with the Bulls in Pamplona and where demand over $1,000,000 is more like one guy strolling along with his cat on a leash. And because of these divergent markets within our Real Estate market you have a dynamic where Downsizers are finding it hard to sell their larger, higher priced home to buy a smaller, lower priced home. What you get for $700,000 compared to the value at $1,000,000 is grossly skewed: a 1400sf 2-story with single garage on a 35ft lot vs a 3000sf 2-storey double garage on a 50ft lot backing onto trees. Twice as much house for such a small premium – and so the Downsizer decides that Aging in Place makes more sense. This scenario plays out across the board when trying to sell a higher priced home for a less expensive home. Like moving from you $600,000, 1400sf bungalow to a $430,000, 600sf condo with one parking space – the value for your dollar just doesn’t add up. Therefore, supply suffers in the face of the Boomer’s plight.
Then there is affordability and the ability to navigate mortgage stress tests to get financing for a home. We have witnessed home prices soar while stress tests have restricted ability to borrow. Essentially, we have a lot of Buyer’s squeezed between the bottom of the quickly rising home price floor and the ceiling created by their mortgage approval limit. Jammed into this small window between about $400,000 and $600,000 creates a Buyer frenzy – sharks after the chum bucket. Buyer’s are bidding up prices and values are rising. And those who are lucky enough to find a home in that range sure as heck aren’t selling their homes after the fight to get one – especially if getting an approval for a higher priced home is elusive. And supply suffers because of the First time Buyer’s struggle.
Then we have Investors. And this is where things get tricky because these investors are hunting for low priced homes where they can get rents that pays the bills. They aren’t just buying where they live. We have Investors from Toronto where the average price of a single detached in the 416 is $1,370,000 and in the 905 at $957,287. Our prices are half what they are experiencing and are a relative deal. These Investors from outside of KW buying homes further add to demand and on the flip side also constrain supply for end users. These individual Investors own multiple homes leaving less for others and are also content to hold these homes as investments where with rising rents, rising home values, high rental demand and low interest rates there is little incentive to sell – especially when they know what Toronto prices have done and they can finally enter the Real Estate investment game. Investors in the mix, adding homes to their portfolios, is also a drain on supply in KW.
There are always exceptions to the norm, and there are other reasons, but I think the 3 above ideas are clear arguments supporting the reasoning behind the shortage of residential Real Estate in KW.
There were only 281 homes sold in January 2020: Down 8.2%
153 Single detached homes sold: Down 19%
39 Condominiums sold: Up 18.2%
21 Semi-detached homes sold: on par
68 Freehold townhomes sold: Up 7.9%
That is the supply side and so we now look at the other side: Demand.
The average price of all residential property sold on MLS is up 15.7% vs Jan 2019: rising to $561,029
The average price for a single detached home: $670,944 UP 18.8%
The average price for an apartment condo: $382,636 UP 26.1%
The average price for a townhouse: $439,765 UP 20.3%
The average price for a Semi-detached home: $484,190 UP 18.7%
To add context to what prices have done: the average price of a single detached home 5 years ago was $372,674. Today’s average price of $670,944 is 80% higher. 80% in 5 years.
Just a tidbit: if you had put 20% down on an average home 5 years ago – so a $75,000 down payment on a $372,674 home – your home would have appreciated by $298,270 resulting in a return of 398% (298,270/75,000). About 80% per year. I don’t think I need to even say WOW – you’re thinking it.
When you see returns like this it’s easy to see why demand for a home is so high. Where else can you live in your investment saving yourself rent and where you can make 80% on your money? And for an investor you aren’t just making the 80% on your down payment – your tenants are paying down your mortgage loan as well adding many more points to the 80% return. Where else can you find that?
And because KW is consistently one of Canada’s fastest growing areas, we see demand derived from more people moving to the area than leaving the area. With population growth of about 2.6% we can expect about 10,000 new people in Kitchener-Waterloo each year. The population of Kitchener and Waterloo in 2016 was about 355,000 with 200,500 households. That puts a household at about 1.8 people per home. If we have 10,000 people moving to Kitchener-Waterloo we would require about 5,500 homes for these new people.
I’m not sure there is anything on the horizon that is going to change these variables.
KW is consistently one of Canada’s fastest growing areas, we see demand derived from more people moving to the area than leaving the area. With population growth of about 2.6% we can expect about 10,000 new people in Kitchener-Waterloo each year. The population of Kitchener and Waterloo in 2016 was about 355,000 with 200,500 households. That puts a household at about 1.8 people per home. If we have 10,000 people moving to Kitchener-Waterloo we would require about 5,500 homes for these new people
Supply of homes simply cannot keep up with demand. Upward pressure on home prices will continue. If you’re a Buyer – first time/stepping up/downsizing/investing – these prices are the new normal. These prices are here to stay. Real Estate is known for being a safe investment and for appreciating very well over time. What is expensive today will look like a steal tomorrow.
As always, Becky and I are happy to chat about Real Estate and answer your questions. Feel free to give us a call or send us a text/email anytime.
