Eric | Nov. 15, 2017
Let’s drive right into this month’s market report. At the end of October, there were only 830 active listings in Kitchener/Waterloo compared to the five year average of 1,522. Supply continues to be tight. L
We did see a pull back in demand in October. 481 properties were sold, down 16.6% versus October last year. Here is what sold:
289 single detached homes DOWN 20.2%
107 condominiums DOWN 17.7%
44 semi detached homes DOWN 7.3%
38 freehold townhomes DOWN 2.6%
I’m not sure the numbers above are concerning. We saw new mortgage rules announced that will commence in January 2018. I think people are trying to figure out what it means. The new mortgage rules expand on the rules that were introduced earlier this year whereby mortgage approvals are based on the greater rate of the 5-year Bank of Canada Benchmark rate OR the rate the bank is offering +2%. This rule affected those seeking a mortgage where they had less than 20% down. As of January, the rule applies to all mortgages – those with less than 20% down AND those with 20% or more to put down.
Right now with 20% down and an income of $100,000 you would qualify for about $730,000. In January, the amount will be about $570,000.
I don’t think first time buyers jump in at the $730,000 price point. Buyers looking at that level probably already own a home. Given the increase in values over the last couple of years, they probably have a sizeable amount of equity in their existing home. Their decision to move would have to consider that more of the equity they have in their existing home would have to be used for their new purchase. Or they look for a less expensive home which probably ends up not being worth the move if purely for want (rather than out of necessity, like a job move).
I think people may choose to stay in their homes because they will have less money that they can pull out of their home, they may have less choice of homes, and they will have to try to get more money for their home to offset the lower amount they can borrow. If more people decide to stay put then supply will likely dry up further.
But what about at the entry level home price – say at about $400,000? If you have 20% down and make about $57,000 a year you can buy a $400,000 home currently. In the new year, you will be able to afford a $342,000 home.
As you can see above, buyers will have to adjust their expectations and buy less expensive homes than they can today. The new rules will squeeze even more buyers into an already crowded lower price bracket. Some buyers, those who can just get a mortgage approval, will be eliminated as a buyer – which makes you think, “well, that will make more homes available”. However, those people still need a place to live so they will continue to rent or will start to rent. The same goes for the buyers that don’t want to adjust expectations and decide to wait until their incomes increase or they save more money for the purchase. Who owns the properties they rent? Investors!
The rental market will get even stronger with these new rules and investors will become even more confident. With greater purchasing power and a desire for wealth, investors will make up for those buyers who leave the market. We can already see this happening. For example, the Circa 1877 condo building in Waterloo sold in days (mostly to internal buyers) and Charlie West, on the corner of Charles and Gaukel, is adding five more stories to their building because of demand. Apartment condos are almost the only property you can buy in this area with a starting price around $280,000 for about 600 sq. ft. By the way, in Toronto the average per square foot price for a condo just hit $1,000!
To sum it up – the rules are going to make demand and prices in the lower price range go up and you’ll probably see some weakness in the higher price ranges.
Phew – that was a lot longer than I expected
Back to October numbers….
The average price of homes in the KW area increased 11.4% to $454,398 versus October last year. The average price has started to move up again which is positive and builds on my September thoughts.
Here is an updated graph:
Single detached homes: $541,368 UP 13.1%
Apartment condos: $249,993 UP 11.0%
Townhouses: $349,316 UP 13.7%
Semi-detached homes: $354,668 UP 8.0%
And that is what happened in October.
There is a lot of confidence out there. The Toronto Stock Exchange is hitting new highs. Unemployment is very low. Wages are increasing. And we live in the best country on Earth!
November should be fun.