Is the real estate market crashing? It's a question that's been on many people's minds lately, especially with all the sensational headlines and clickbait articles trying to grab our attention. But let's cut through the noise and dive into the data and trends to get a clearer picture of what's really happening in the real estate market.
Understanding Key Indicators
To assess the health of the real estate market, we need to look at several key indicators, including interest rates, inflation, bond yields, inventory levels, sales data, and more. Let's break down these factors to better understand the current state of the market.
Interest Rates and the Bank of Canada
Interest rates play a crucial role in the real estate market. As of now, the Bank of Canada has not raised the key policy rate due to concerns about cracks in the Canadian economy. However, they have left the door open for future rate hikes. Why would they do that when there are already concerns about the economy's stability?
The answer lies in the power of words. By leaving the possibility of rate hikes on the table, the Bank of Canada can influence the bond market. When investors perceive a chance of higher interest rates, they flock to buy bonds, driving yields down. Lower bond yields, in turn, make mortgage rules and lending products more flexible and open, potentially increasing liquidity in the market.
In other words, the Bank of Canada's strategy is not only about raising interest rates but also about using their words to manage market expectations.
Interest Rates and Mortgage Rates
Let's take a closer look at how interest rates affect mortgage rates. Currently, the best five-year fixed mortgage rate stands at 5.39%. Bond yields, on the other hand, are at 3.914%, creating a spread of approximately 1.44%. This spread is in a neutral zone, meaning that mortgage rates are stable for now.
If bond yields drop further, it's likely that the five-year fixed mortgage rate will also decrease. Conversely, if bond yields rise significantly, the spread will shrink, and mortgage rates may increase. At present, we are in a neutral zone, so there's no immediate expectation of mortgage rates dropping unless there's a substantial dip in bond yields.
Inventory levels are a critical factor in assessing the real estate market's health. In September, the five-year average for homes for sale is 236. However, there are currently only 227 homes available, and after accounting for conditional deals, the net inventory stands at 220. This indicates that we are still in an undersupplied real estate market.
When we break down the inventory mix, it becomes clear that the single-family market is heavily undersupplied, while condos are actually oversupplied when compared to the five-year average. In downturns, condos are typically the first to flood the market, as they are often investor-owned or used for student housing.
Despite the market's ups and downs, the inventory levels have remained relatively low, contributing to the market's stability.
Examining sales data reveals more about the state of the real estate market. In August, we saw 6.5 homes coming to the market daily, which is 15% less than the five-year average for the Guelph real estate market. However, this trend of lower inventory has been ongoing for some time, with up to 30% fewer homes coming to the market earlier in the year.
On the other side, sales have also dipped, with a significant 35% reduction in August compared to typical sales numbers. This trend of lower sales has persisted throughout the year, with a 22% reduction in sales compared to the five-year average.
Despite the reduced sales, inventory levels have not surged because sellers are taking their homes off the market. In August, an average of 2.9 sellers per day removed their homes from listings, an 18% increase over the five-year average.
Average Sale Prices
One of the most closely watched indicators is the average sale price. In August, the average sale price dropped to $771,000, down from $882,000 in May. While this may seem like a significant decline, it's important to consider the broader context.
Back in January 2023, the market reached its lowest point at $720,000. Since then, the market experienced a surge in buying pressure due to favorable interest rates. However, two rate hikes in May and June temporarily cooled this pressure, leading to a decrease in average sale prices. Nevertheless, when we look at the market on a year-over-year basis, prices are still up from previous years.
Market Stability and Buyer Opportunities
So, is the real estate market crashing? The data suggests otherwise. Despite fluctuations, the market remains relatively stable, with prices still up on a year-over-year basis. Factors like interest rates and inventory levels contribute to this stability.
For potential buyers, this market offers opportunities. With lower buying pressure and a balanced inventory, buyers have more negotiating power and can take their time to find the right property. Waiting for the right moment to enter the market can be a wise strategy, especially when others are fearful.
In summary, while the real estate market is not without its challenges and fluctuations, it is far from crashing. Understanding the nuances of the market and the influence of various factors can help you make informed decisions whether you're buying, selling, or investing in real estate.
For personalized advice tailored to your specific situation, feel free to reach out to the Zahnd team. We're here to help you navigate the ever-changing real estate landscape.