The recently released third quarter home sale data for Toronto and for all Canada were quite amazing to me. The annual increase in the National average home sale price is 11.3%. The average increase of the home price in Toronto from September 2008 is 10%. Currently, the average home price in Toronto is standing at $406,877. Number of sales in Toronto from September 2008 is up 28%. Can any of us, homeowners and investors, dream about such appreciation? Are we really in recession? Let’s have a look at the other side of the coin. Unemployment is rising and approaching 10%. Canadian dollar is almost at parity to the US dollar, which is hurting the Canadian export. Number of bankruptcies hit historical record in 2009 - 4.3 bankruptcies per 1,000 people. Bad debt on credit cards is high (1.2%), the number of consumer loans in major arrears has risen to 1.7 % (compare to 1.4% in 2008). Total debt of Canadians rose by $44 billon only during the first six months of 2009. So what is really going on in the real estate market? Feast in time of plague?
The CHMC data shows that the main driving force for this unprecedented sales/price growth is the first time buyers. They are driven by artificially low interest rates, seemingly high affordability, pushy realtors and ... greed. I would think that to a reasonable buyer a 10-20 multiple offer competition on a property is a warning sign. Bidding wars inflate price easily by 10-15%, offers with no conditions are numerous on the market! Who in his healthy mind would put an offer without financing/inspection/insurance condition? Again and again, only two forces drive the market: fear and greed. The buyers understand that the window of low interest rates will not be open forever, that is why now it seems that we are borrowing or stealing (if you will) the buyers from the future, specifically from 2010-2011. Those who would sit and wait to save for a larger downpayment and more stable job now are pushed into a 5% down, 35 year amortization with a closed variable rate deal. Sounds to me like pulling the devil by the tail.
Apparently, this summer indicates that low interest rates are not the best friend to the real estate investors. We do not like to compete with the greedy crowd. The short window of investment opportunity was in January-March 2009 when the interest rates were low and fear dominated the market. That was the time when I and many other investors made their purchases. The next window of opportunity is coming. The truism that money to be made on the purchase is still in force.
What do the investors do now? Well, obviously the sophisticated investors never line up for a deal, they do not buy when crowd is buying. When greed dominates the market, the sophisticated investors sell or simply wait gaining “the fat” for a real hunting season. Also, it is the best time to go to fundamentals and to run “a stress test” on your portfolio at 5-6% in order to make sure you are not over levered. We all remember that the leverage is a double edge sword.
What is our rate forecast for the next 6 month? My crystal ball tells me that the interest rates will likely remain low at least until spring of 2010, then gradually increase by 2 -3% in the next two years. Variable rates will slowly move into negative territory (P-0.1%, then P-0.2%). Fixed rates will climb up (5 year fixed 4.3%, then 4.5%) despite the “frozen” prime.
What do the real estate investors have to do? Obviously study the market and wait for the opportunities which will definitely come in great numbers in spring-summer 2010 when interest rates climb, HST hits the ground and inventory as well as number of foreclosures increase. What unreasonable went up, will always come down.
Happy investing!
Igor Iskra
October 17, 2009
