Royal LePage - Your Community Realty, Independently Owned and Operated, (905) 731-2000
Jim Reid, Broker, (905) 731-2000
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INSIDE THIS ISSUE: |
MARKET FACTS: |
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1. WHERE IS THE BOTTOM? 2. TEMPTATIOUS MORTGAGES 3. MARKET REPORT 4. ECONOMIC REPORT |
1. GTA UNITS SALES DROP 31.5% in February. 2. GTA AVG. PRICE recovers 5.1% in February |
1. WHERE IS THE BOTTOM?
"Are we there yet?" is the question that plagues parents when taking their young children on a trip. Nowadays adults are asking me this question about their property value.
The GTA market demonstrated its' resiliency in February in both unit sales and prices. Unit sales were down 32% from last February, but this wasn't as bad as the 47% drop last month. In fact, the season jump-up from January to February, which was 19% last year, was 54% this year. In other words, there was a more positive outlook by buyers in February compared to January this year.
Similarly, the value of GTA properties rose 2% from January to February last year, but this year they increased by 5% to $361,305. Homeowners are not surrendering to the bad news spewing out of the media. There is a core Canadian confidence that we will pull together and get ourselves out of this financial crisis on our own.
So, how low can we go? GTA prices peaked close to $275k in 1989 and in 2002. They dipped 28% by 1996 to $198k. In April 2008, the market peaked again at $398k, i.e. 45% above 2002.
Since then, YTD prices have slipped 11% to $354k. To drop to the old mark of $275k, prices would have to decline 31% during this recession, ie. a further 20%.
But, I don't foresee prices falling through the $300k mark in the GTA. This would require a further decline of 15% in the average prices for this year. We may see this happen for a month or so, but it seems more likely that we will not fall more than another 10%. This would take us back to 2004 prices.
Since then, the 350,000 buyers in the GTA have seen their home equity slashed by 50%. They are in no mood to sell at lower prices. It is the people who bought in the 1990's who have accumulated significant "paper" equity, who can justify accepting a lower selling price in order to change their lifestyles or cash flow structures. There will also be more "distress" sales than usual to help pull prices down.
But, even if unemployment rates rise to 10-12% in the GTA, 88% of the homeowners will not be forced to move. Canada also expects over 200,000 immigrants this year, and many of them will head for the GTA.
So, my rock bottom line this year is another 10%&ldots; and it won't surprise me if we don't get there in 2009.
2. TEMPTATIOUS MORTGAGES?
Ok - so there is no such word yet as "temptatious", but it sure describes current mortgage rates.
With prime at only ½%, the central bank is making it very easy for our bankers to provide cheap credit. Five-year mortgages are down to 4.25% and even commercial loans over $1m are below 6%.
So what's the risk?
The main uncertainty is where property values will be in 2014, five years from now. Will values be at least 5% higher than now so that I can recover my interest payments and my down payment?
Let's look at a $300k rental property purchase. Our 25% down payment is $75,000. At 4.25% interest, with a 5 year term and a 20 year amortization, the monthly payments on our $225,000 mortgage are $1390 and taxes about $210, i.e. it carries for $1600/mo.
At the end of the five years, the mortgage is down to $185,000. Suppose we sell the property for 5% more than we paid for it, i.e. $315,000.
With selling costs of 6%, we clear $296,000. We pay off the $185,000
mortgage balance and have $111,000 in our bank account. The $75,000 we originally invested made us a 48% return over 5 years. Not bad eh!
But let's be more conservative. Suppose we didn't have any tenants for 6 months. Our $36,000 profit is now reduced $9600, ($1600 x 6). Thus, our return is reduced to 35%. This still isn't too bad.
Of course, the market might fully recover in five years and we will sell at $350k. This will produce a 92% return over the next five years. Now we are talking!
So, the bottom line is that, at these low interest rates, there is a growing potential upside to a real estate investment now in the GTA.
3. MARKET REPORT
People are telling me that they seem to be seeing more For Sale signs than usual nowadays. Indeed they are, as active local listings were up 49% over February 2008.
But most of these are being carried over from last Fall as the number of new listings is down close to 15%. Unit sales are also down 33% from last year, but we saw a nice jump up of 9% in February prices over January prices. Thus, all buyers aren't out to force huge discounts on sellers.
My last two "Open Houses" on February 21st and 28th were also encouraging as I was kept busy answering questions of buyers and potential sellers for the full three hours each day. These good turnouts in lousy weather suggest that the Spring market may arrive early this year.
The low bank rate will likely have a very positive influence on buyers as they perceive that they can get a good price, plus a low mortgage interest rate this Spring.
For those thinking of selling, you should consider the fact that this year there will be fewer purchasers in your price range. Thus, you should get started on fixing up your home right away so you don't miss any buyers.
Also, you should seriously consider getting my advice on whether you need a home stager or not before you begin any fix-up projects. Nowadays, what you do before you put your home on the market is much more important than what we do after it is on the market.
4. ECONOMIC REPORT
The CBC's Peter Mansbridge recently interviewed "Canada's three top economists".
The one from the bank said, "We need more bank liquidity." The one from the autoworkers said, "We need more jobs." And the one from The Fraser Institute out West said that, "We need to have higher commodity prices."
Duh! Of course all these things would help, but they didn't have any idea how to make these things happen. They all agreed that the government's massive spending programmes won't reach the markets until next year and even then they won't have much impact anyway.
My position is that we aren't going to see more liquidity, jobs and prices until consumers feel positive, or at least hopeful about their futures. In the meantime, we are likely going to see lots of "false starts" as investors try to anticipate market up ticks based upon bits of positive news or positive comments by the same bunch of gurus who didn't see the recession coming up behind them.
My perspective is that the economy and many industries have been in need of an enema for a long time. Most of the serious toxins in the financial systems have been tagged and there are real efforts being made to flush them away with the least possible pain. Similarly, income statement and balance sheet excesses created during the twelve-year boom in the industrial sectors are being addressed by wage freezes, benefit reductions and labour overhead reductions.
Hopefully, one of the benefits of rapid automation and computerization during the past decade will be the speed with which companies and industries may adapt to more efficient financial and structural changes. If they are as flexible and adaptable as we hope, then we will put a lid on unemployment sooner than later. Job security will be the key to our economic turnaround.
However, the rate of recovery will depend upon the ability of consumers to get their cash flows out of crisis mode. So far, the government hasn't responded to the dire needs of families and consumers with significant policy initiatives directed towards this foundational economic sector.
"IS ANYONE MANAGING OUR COUNTRY?"