October 2017 Oakville Housing Market Update

SYNOPSIS:

October continued the trend of slower sales volumes (down 27% YTD) with prices up from June/July/August levels but down slightly from September.  Average prices for the month were $1,202,000 (October) vs $1,215,000 (September).  While prices are relatively flat from September, much of this price stability was generated from some high valued sales in October.  We know this from looking at Median sales values which are down to $950,000 (October) from $1,070,000 (September).  Overall, values are still up +11.7% vs the 2016 Average.

In October much media attention was given to OSFI tightening lending restrictions for uninsured mortgages (impacting borrowers with ≥20% down).  Borrowers will now have to qualify on 200 basis points above their rate hold or at the bank’s 5 year posted rate for those with a <5 year rate.  Most lenders are implementing these rule changes ahead of the January 1, 2018 cutoff. We are currently seeing the last of the borrowers buying under the old requirements.  Many expect these lending changes will further dampen the market, but many debate the length and size of the impact.  Anecdotally, I have found most buyers are being more cautious and many are sitting on the sidelines to see the impact of the changes on home values.

oakville days on market
Oakville Sales Volumes
Oakville sales volume percentage change
oakville average sales price 2012 to 2017
average sales prices vs 2017 average
average sales price vs 2016 average
oakville median sales prices 2012-2017
Average Housing Price Changes vs Prior Year
Average sales prices 2007 to 2017

The Relationship Between Interest Rates and Home Prices

the-relationship-between-interest-rates-and-home-prices

This article is about interest rates...everyone's favourite topic right?  I know it's a boring subject but it's relevant so here's my take on how it will impact home values.

Background
As a recap...the Bank of Canada makes 8 announcements every year, roughly once every 6 weeks.  Stephen Poloz, the Governor of the Bank of Canada, announced this week that the overnight lending rate is going up 0.25%.  Variable rates are tied to the overnight lending rates so when the Bank of Canada raises rates, anyone with a variable rate mortgage is impacted by the change.  Anyone shopping for a variable rate mortgage is also impacted as variable rates are usually offered at the prime lending rate give or take a certain percentage.  If you are a homeowner with a fixed rate mortgage, your monthly mortgage payment is unaffected by the recent announcement however, anyone who is shopping for a home IS affected.  Here's where it gets a bit more complicated.  Unlike variable rates, fixed rates are not directly linked to overnight lending rates.  Instead, fixed rates are linked to government bond yields so as bond yields go up, fixed rate offers (for anyone needing a new mortgage) go up as well.  A number of factors impact bond yields, including overnight lending rates, economic policy, investor sentiment of the health of the Canadian economy, etc.  In summary: when the Bank of Canada increases their overnight lending rate, variable rates will almost certainly go up (usually by the same amount) but fixed rates won't necessarily follow.  This is why some banks chose to increase their fixed rates ahead of last weeks announcements.

Most home buyers have "rate holds" from their bank when they get pre-approved for a mortgage.  In essence, the lender will typically say, "a rate of X% will be honoured should you buy and close on a property within the next XX days" (I think most banks offer to hold rates for 90 days but some may be longer or shorter).  We are now in a situation where a number of buyers have an opportunity to buy a home with a better interest rate IF they can buy (and take possession) before their rate hold expires.  This is a short window of opportunity for anyone luck enough to have a lower rate hold in place.

And Now Some Math
Historically the Bank of Canada hasn't raised the overnight lending rate by more than 0.25% at any given announcement.  To put that in perspective, someone with a $300,000 25 year mortgage with a variable rate of 2.25% would have to pay an extra $37 a month if the rate increased to 2.5%.  This doesn't seem like a big deal, right?  For most it won't be.  If you have a $900,000 mortgage, your rate would only go up $111/month.  The point is that while no one likes higher interest rates, 0.25% is hardly going to break most people's budgets.

The Psychology of Real Estate
So if it only minimally increases mortgage amounts, what's the big deal?  Well, from my experience real estate is based on a combination of fundamentals and market sentiment.  I would argue that market sentiment was responsible for much of the price increases during the first few months of this year and has been subsequently responsible for the cooling off period that followed.

Before this week's announcement, the overnight lending rate had not been raised in 7 years.  This is an amazing run.  It has been so long lived that many of us haven't owned a home through a period of high interest rates, certainly not the rates of the early 80's when 17-18% interest was the norm.  In mid April the Ontario government released an action plan to curb real estate price increases and a flurry of negative press on "overheated" markets was published.  All of this has people questioning real estate values and is making them more hesitant to buy.

I believe that underlying economic fundamentals are still as strong as they were at the start of the year.  If anything, rising rates means that our economy is picking up steam which is generally a good thing.  It's the market sentiment that is really the big question mark at the moment.  

My Take
Buyers and Sellers are adjusting to a rapidly changing market.  Assuming there are no more unexpected changes looming in the short term, people should start to adjust to the new realities of the market, prices will stabilize and people will be less hesitant to buy and sell.  In the near term, we may see a slight lift of buyers who are incentivized to buy before their rate holds expire.  Unlike other investment vehicles, real estate isn't just bought to make a profit. People continue to move for work, expand their family, get married, get divorced, downsize, etc.  Once things settle in the market, I think people will feel more secure about housing values.  Life will go on as it always does to the point that the buyers who have hit pause will start to look once again.

What Happened to Housing Prices in May?!?!

There is a lot of hysteria right now in the real estate market.  If you want to cut through all the opinions and see some hard data on what is happening, this post is for you.  Below are 5 graphs which help illustrate how the local Oakville market has been changing both by month, year and neighbourhood.  The data below shows a trend in the past two months of lower prices, lower sales volumes and higher inventory however if you compare this against data over a longer period of time, you will see that prices and sales volumes are still higher than they were just a few months ago and inventory levels (months of inventory) aren't hugely out of line with historic levels.  There is no question the market has softened since it's peak in March.  How long it will take to stabilize and get stronger remains to be seen however the trends of the past 2 months show that while things are slower, they are no where near the catastrophe some believe it to be. 

Average Annual Sales Values

The average price of an Oakville home is sitting around $1,265,000 in May 2017 (just shy of $1,300,000 YTD).  What is most prevalent is the steep uptick in prices since 2015. 

Monthly Price Changes

If you have been a homeowner for years then congratulations!  If not, then this graph shows just how much prices have increased over the past 10 years.  The sharp uptick in prices from January 2016 onwards is certainly not following the trendline.  While the market may seem drastic, there is still a significant difference between sales values in May 2017 versus sales values of even fall 2016.

Neighbourhood Sales Volumes

This graph highlights the average sale volumes by Oakville neighbourhood.  Keep in mind that volumes are down almost across the board however some areas have been hit harder than others.  Some areas have relatively small sales volumes which can swing the percentage amount significantly.  If you want to look for buying opportunities, this graph is better looked at over a longer period of time. 

YTD Sales Volumes

Overall, most of Oakville is still seeing high levels of sales volumes versus the first 5 months of 2016.  The impact of May 2017 may be partially offset by buyers who bought earlier in the year, worried about prices going further out of reach.

Months of Inventory

This graph takes the number of active listings in each area divided by the number of sales to see how quickly homes are selling.  Generally speaking, experts will classify anything between 0-4 months inventory as a "Sellers market", 4-5 months of inventory as a "Balanced Market" and 6+ months as a "Buyers Market".  Glenorchy, the area north of Dundas street is currently being hit particularly hard with sell through rates which may in part be due to the level of investment activity in the neighbourhood (investors looking to cash out in light of market predictions and/or new market regulations).  We have been in a "Sellers Market" for most of the past decade so while things feel very slow right now, the reality is that homes priced right for the current market, are still selling fairly quickly.

Historical Months of Inventory

This graph gives a historical look at months of inventory.  Note that the more expensive neighbourhoods of Morrison, Southwest and Old Oakville have historically had longer than average months of inventory.

Why Are Home Values Changing so Quickly?

Trying to figure out where the market is right now?  If so, this post is for you.  It has been almost two months since the government regulations hit the market.  While markets shot up at astronomical rates in the first three months of the year, they have changed immensely in the past month and a half.

Let me start by stressing that the government regulations that came into effect April 22nd were not known to be coming until a week before they hit.  For the first 3.5 months of this year, all people heard about was how hot the market had become and the government was very non-committal about what action if any they would take.  Ontario’s largest real estate board, the Toronto Real Estate Board or TREB was very vocal that foreign buyers and investors was not an issue, that the real issue was a lack of housing supply.  The market is now adjusting to this news as I will highlight below.

Below are the main points of the Ontario Housing Measures announced on April 22nd (skip to the "MY TAKE" section if this is old news to you) :

Biggest Changes:

  • Provincial Government implemented on April 22nd a non-resident tax of 15% in the Greater Golden Horseshoe Area (this includes Oakville and communities as far as Niagara to Orillia and Peterborough).
  • Review certain real estate practices, specifically speculative transactions (home flipping, assignment deals, etc)
  • Allow certain municipalities including Oakville introduce and implement vacancy taxes (Oakville’s Mayor Rob Burton has been very vocal about wanting to reduce the number of vacant homes held on by property investors)
  • Strengthen tax reporting requirements to crack down on investors not properly reporting real estate investment gains
  • Look to increase rent control legislation

 

 

map-of-golden-horseshoe

Other Changes:

  • Clean up the real estate industry to protect consumers by reviewing Realtor rules and educating consumers on their rights
  • Increase affordable housing supply
  • Create a team to identify and address obstacles to development
  • Create a team to advise the provincial government on the housing market and the impact of the above changes
  • Update the Ontario Growth Plan with municipalities to review density measures and unit sizes.
  • Update the Residential Tenancies Act and standardize rental lease language
  • Create more equity among property tax rates for multi-unit apartments vs other residential properties
  • Invest $125M over 5 years to encourage the development of rental apartment buildings
  • Give more flexibility for municipalities to fund development through property taxes

MY TAKE:

So what does this mean for Oakville property owners?  For most, it means nothing.  The fundamentals of the economy are the same, we still have high levels of immigration, a diverse economy, low interest rates and low unemployment.  Oakville’s schools continue to rank some of the highest in all of Ontario, we are a hot spot for executives and Millenials looking to grow their family and we are centrally located to accommodate two income families commuting to different parts of the Golden Horseshoe.

However…it is easy to see how these regulations have a large and immediate impact on buyers and sellers currently looking to trade real estate:

1.       Buyers and Sellers perception of the market has changed - Newspapers are now talking about “crashes”, economists are discussing “what-if” scenarios if housing declines further.  People are generally feeling uneasy and some are completely spooked depending on their risk tolerance. 

2.       Local Investors are more likely to sell now - If you are an investor, it is easy to understand why you may feel like now is the best time to sell, especially before tax reporting loopholes are cut off.  Vacant taxes are a concern (Oakville’s mayor, Rob Burton has been a vocal supporter of a vacancy tax).  Rent control measures are also concerning to investors

3.       Foreign Investors are also more likely to sell – again to potentially evade new tax reporting measures or perhaps because they are seeing other more lucrative investments.

4.       Local and Foreign Investors Not Incentivised to buy - If you are an investor, you are likely waiting on the sidelines to see if further regulations are made and see if the market drops further before buying.  If you are a foreign investor your profits just got cut way down and you are also likely sitting on the sidelines. 

5.       More Home Owners Looking to Cash Out – Some baby boomers feel that the market has hit it’s peak and it is now time to cash out of Oakville

6.       General Market Forces Impacting Current Market - Buyers certainly don’t feel the same level of pressure to buy now before prices go up.  We also have a timing situation where many buyers who normally would have waited longer to buy, pushed their timing up to the winter/early spring market as they worried they would get outpriced if they waited further.  Unlike more balanced markets, where some people buy first, others sell first, for the first 3 months of 2017, almost all chose to buy before selling.  We are left with a market where there are many motivated sellers (they need to sell to close on the home they bought in March/April) and not so motivated buyers. 

All these market forces combined are putting downward pressure on prices in the near term.

BOTTOM LINE:

Buyers do not like the uncertainty in the market.  The incentive to "buy quickly" before prices rise has more or less evaporated in the past two months.  Buyers are taking their time and enjoying the higher level of inventory as the wave of incentivised baby boomers and investors cash out of the market.

This does not spell disaster but it does make for a quick swing in home values.  Bear in mind that from January-March, housing values went up 34.6% in Oakville.  While a 6 week price decrease of 5.4% seems drastic in isolation, it still puts values up 28.4% year to date.  The only people who are being unfairly punished in the short term are the relatively tiny pocket of home buyers who purchased in late February to early April of this year. Remember, Oakville home values increased roughly 27% in 2016 and have been up year over year for most of the past TWO DECADES so the overwhelming majority of homeowners have made ridiculously handsome profits on their homes.  Heck, we're still up 28.4% Year to Date.  Yes, it is horrible for those who bought at the height of the market but underlying market conditions (interest rates, centralized location, supply limitations, high levels of immigration, high ranked schools and diversified economy) are more or less unaffected by the government changes.  Once the market responds and absorbs the impact of the housing measures, the market should stabilize once again.

The question remains is now a good time to buy?  This depends on how long you think the impact of the government measures will take to work their way through the system.  Buying a home is also very dependent on your goals, the type of home you are looking for and the particular neighbourhood you like.  Hearing what happened to your friend in Thornhill who is selling her condo is very different than what you will encounter trying to buy a detached home in South Oakville. While friend's experiences and the anecdotal newspaper story or overall GTA statistics may give some directional evidence of what the market is doing, it should never be your primary source of deciding when to buy.  For that you need local statistics which I will be exploring in my next blog post.  Stay tuned...