Knowledge and Learning

In March 2021, I was invited to share his thoughts on the real estate market with the Art of Investing television show, with host Naeem Khiyani.

Have a look at the video, and there are some notes below about the topics we discussed.

Why is the real estate market getting out of hand for a new buyer?

In most areas, we’ve seen values rise by 20-30% in the last 12 months.  SALARIES aren’t going up that fast.  So what’s happening?

  1. Combination of more savings (less social life, less vacations)
  2. Wealth being passed down by baby boomers
  3. A huge group of millenial buyers in their prime years for buying
  4. Low interest rates
  5. And the good old fear of missing out

This market caught us all off guard… we weren’t expecting this.  At the start of COVID in March 2020, there were an equal number of buyers and sellers that were going to sit it out… but the ratio stayed the same, so the market didn’t change.  When things felt safer, the volume went up, but the same supply & demand factors remained from the days before COVID.

Is over asking bid war still going on?

YES BUT it’s not as guaranteed as it was in January, February.  In any market there are pockets of listings – one bed condos can be a completely different market than two bedrooms, as an example.  Some people only base their price on HISTORICAL SALES, but that’s history that has already happened.  You have to THINK AHEAD OF THE MARKET to be successful.

YOU HAVE TO LOOK AT COMPETITION and think like a buyer… which one would they choose, out of all the options?  How do you fit in?  What’s your unique offering to buyers?

One of our favourite expressions is, “To catch the mouse, you have to think like cheese.”

Do you think that affordability will get any better soon?

Not at all.

We won’t appreciate at the same rapid pace, but there’s just too much demand and not enough properties being built.

We’ve seen it over and over – stress tests, taxes and various government interventions have tried to chop the market down – but the hunger for buyers to own real estate is too strong.

For 18 years I’ve watched this market appreciate, and about 4-5 times I thought, “OK we’re done”.  But right now, I don’t see this stopping anytime soon.  It will eventually, but there’s still a lot of fuel in the tank.  Which is fascinating, because the AVERAGE property in Milton right now is worth about $1 million.

Immigrants would need a new house. Is the condo market getting more attention than semis, towns, and detached?

More people can buy at the lower price point than the higher, so there’s more demand the lower the price point.

There’s also more attention from the GOVERNMENT.  Milton used to build at a density of about seven homes per acre.  In the early 2000’s, they increased to about 12 homes per acre in the first phases of building the new neighbourhoods.  Now they’re up to 16-18 homes per acre, and very soon it will be 20-25.

The Province of Ontario has made it clear that they want more density, and more concentration of homeowners per acre, and don’t expect that to change.  So those detached homes on larger lots?  They will become more and more scarce, just like we’ve seen in the City of Toronto.

We used to find single income people buying semis and detached homes 15 years ago. That doesn’t happen anymore.  It’s almost all two income families to afford these prices.  You have to start further back in the chain now. The condo is the new semi-detached.

Investors are investing outside of GTA; would this affect the valuation of GTA?

With work from home options available, combined with the affordability of the markets outside of the greenbelt, expect these areas to continue rapid appreciation.  Cities like Windsor and London were sleepy markets for many years… but then people kept getting pushed further and further out… and those markets got hot.

MY THEORY OF $600,000

Buyers qualify with the stress test for about 5x their gross income before taxes.  Generally speaking, $100k household income is pretty good.  When prices are rising up to $600,000, we see migration patterns IN.

When the average price point hits $600,000 and above, we see migration patterns OUT.  Buyers chase that number.

If you buy a $1.2 million house right now, it’s because your townhouse is worth $900,000.  The SPREAD is still the same as it was five years ago. The water level rose for both properties, relatively equally.  We still find that the capacity for borrowing is the same… most families don’t want too much more than a $500,000 to $600,000 mortgage.

That should give people peace of mind… stop trying to time the market if you’re already a homeowner.  Buy your ticket to get on the train as soon as you can… I have never met anybody in my life that regretted buying real estate 20 years earlier.

If you already own a home, move when you need to. If you’re happy with it, and the payments are comfortable, STAY.
Don’t sell because the market is up. Because you’ll just have to buy in the same market conditions.  The gap between the purchase and the sale is the most important thing to watch.