Since the financial meltdown of 2008, real estate’s been the asset of choice. In fact even earlier – with Nine Eleven – most people started falling out of love with mutual funds and tech stocks, and retreated to the property womb. Thus began the greatest housing boom in Canadian history.
But all booms end. And now that 70% of us own some, financed with an ocean of mortgage debt, real estate’s the new Nortel. Will 2013 be the year everybody gets squished when the elephant rolls over?
That depends on you.
Here are five housing trends to mull.
Pent-up demand. Not from buyers this time, but sellers. After all, last year brought new mortgage regs, tighter banking rules, slowing sales and the first negative media stories about real estate since the bust of the early Nineties. As a result, legions of sellers withdrew their properties rather than extending listings and risk getting vultched in a crappy market. As 2012 ended, there were nothing but pooches for sale in many neighbourhoods. It was like going to a retirement home looking for action.
The drought ends soon. If the winter continues to be wimpy and warm, then Realtor Spring (the actual name of this season) begins on or about Sunday, January 20th. I’m anticipating a tsunami of new listings from sellers anxious for better prices who, ironically, will be hastening the opposite.
Mortgage moves. Rates will be higher in 2013, but not because the central bank wills it. Instead, the mighty and massive bond market will make it so, as money flows out of fixed income and into equities. VRMs won’t move, but fixed-rate loans will, and by enough to ruin the finances of many people with loans coming up for renewal in the summer and the fall.
So, deal with it early. Like now. If you have a renewal looming, go five-year fixed. Rates are still ridiculously cheap, and by 2018 they will look absolutely absurd. It’s an historic opportunity to lock in. Don’t blow it by going variable rate. And if your mortgage has a year or two yet to go, consider a blend-and-extend. This will drop the rate down in the remaining years and protect after that.
One more thing: don’t overpay your low-rate mortgage. It makes no sense to accelerate payments, shoveling your family cash flow into paying off a 3% loan, when you can invest the money in a balanced, well-managed portfolio for a few years making twice that amount. Then when the mortgage term’s up, dump the cash against the principal and trash the thing far sooner.
Condo tumble. Hardly news that Ottawa’s recent changes will blow up this segment of the market first. The numbers are already grim. In the GTA there are 6,000 resale condos listed, and sales last month crumbled by 25%. Over 17,000 units are new, yet vacant. There are 53,000 more in the pipeline.
The greatest damage here will be to the psychology of a whole generation of buyers who will see friends’ finances destroyed by their unbridled and naive horniness to ‘stop throwing money away on rent.’ Instead, they just lost it. The damage to real estate in general will start being felt late in 2013, and last longer than puberty.
Illiquidity. The mainstream media, as usual, will declare the housing market healthy so long as prices don’t collapse by a third. But what really matters is being unable to sell your home. In 2013 this’ll be the thing more and more homeowners lose sleep over as sales decline, buyers realize time’s their best weapon and days-on-market turns into months-on-prozac.
So if you’ve been thinking of selling, take the advice of realtors in Vancouver or Victoria – where illiquidity’s now a fact of life. Price aggressively from day one. Below recent comparables. Way below. The worst case is you’ll take a loss now, instead of waiting months for it. The best is you might find two competing idiots who didn’t read this. Reporters, maybe.
Finally, micro-markets. For almost four years real estate went up everywhere. Now it’s going down, but selectively. Hardest hit will be those areas where the largest proportion of people took on the most financing – and where the average home price is the greatest multiple of local household incomes. This is why Vancouver (average multiple 11), for example, will fall (and is) before Calgary (multiple 5).
All real estate is local, even though national events affect it universally. Of greatest import is supply and demand, and where demand is less affected by tighter mortgage rules, shorter amortizations or million-dollar insurance caps, expect a different outcome. People will continue to want areas people have always wanted. In other words, never buy just because it’s cheap. Chances are it’s about to get cheaper.
Instead, buy the worst house on the best street. And if you own that house, well, sell it.