When real estate is lacking the stability (or lacking at least the certainty of rising rapidly in value as it had been until last year) and mortgages are more difficult and expensive to take on, I notice friends of ours with capital and uncertainty how/where/when to deploy it. Stocks are experiencing some volatility as well, and when the conversation of inflation arises, people are hesitant to keep funds in their bank account for fear it could “devalue” or lose purchasing power.
Depending on the risk tolerance and the short- and long-term plans of the individual I’m speaking with, there are several ways to approach this.  Here are a few ideas I’ve recommended to others and seen them experience success with all of them.

1.     Keep saving.

2.     Getting rid of high-interest debt (especially consumer debt) is paramount. Start with the credit cards, work your way down to the lines of credit. This is not to say everyone needs to find a way to pay everything off but limiting exposure to slow financial ‘bleeding’ is wise. Take inventory of where you’re paying interest on things. This could involve putting holds on a few other things, like vacations or other large purchases that can’t immediately be paid for in full. Earning even 5% or 8% on money anywhere right now (which few people are managing to do) is irrelevant if your debt is financed at rates higher than that.

3.     Tackle your vehicle loans. Some auto loans aren’t terrible if the terms are favorable. But calculate what your actual money going out the door monthly is for a vehicle, then multiply it by the number of payments/installments to be made over the entire term of your loan. You might be surprised how much that vehicle will cost you to pay off.

4.     GIC’s or other high-interest options through your bank. Long-term, not a terrific investment strategy. But a very low-risk way to hedge a bit better against inflation.

The past 4 weeks or so, listings in all sorts of price ranges and neighbourhoods of the Fraser Valley and much of the Lower Mainland are seeing competing offers again! And we’re getting asked the question: with the cost of living so high, and interest rates limiting so many purchasers, how are competing offers happening?
It’s simple, and in my opinion unlikely to last long. We’re just coming a time of year (January-February) when there are traditionally very few listings coming on the market. This year has been, so far, an extreme in that way. Inventory is low and, if low enough, it can create competing offer situations amongst even a relatively small number of active and ready buyers. This is what we’re seeing now.  While there are a lot of hopeful buyers ‘waiting for prices to drop more’, the reality is that watching the market and being pre-approved for a mortgage and actively looking for a home are two different things. And the consensus we’re hearing from numerous friends in the mortgage industry is that there really aren’t many new pre-approval applications being received and processed. So, what this means is that as we head into the spring with instability in the market and expecting the traditional increase in number of new listings that usually begins to take place in March and lasts until around May, the number of listings on market could very quickly and significantly outnumber the buyers capable of purchasing them. And we are noticing signs of this beginning to take place as more sellers prepare to put homes onto the market.

When chatting with a prospective Buyer, I’ve found just about everyone lands in one of four unofficial groups. And recognizing these groups is helpful when determining the advice and guidance I provide them with. These groups are:

1.  First-time buyers (or others who are not with the sale of another property). Timing of the purchase is usually determined primarily by readiness to buy. They can also be influenced by how the market is trending, but motivation to get into the market is a driving factor. Usually in a flexible living situation (living with parents, renting, etc.) where there’s less urgency to buy if it’s not a good time personally or economically to do so.

2.  Buyers who are upsizing, pricewise. Usually, this group ranges from first-time sellers to families (25-50 years old). Often, those in this group will upsize more than once and, although everyone wants to sell for as much as possible, timing of each move is usually determined by the right ‘next place’ being affordable and available. The next place will usually be occupied for longer than the previous one was and securing it for a comfortable price point the priority. This move is almost always a family-oriented move determined by families growing, career opportunity, schools, hobbies and interests, etc.

3. Buyers downsizing. This usually occurs amongst older demographics and involves a varying blend of moving to simplify lifestyle (eliminate stairs, less square footage, etc.), to simply financial burden in preparation for retirement or other priority shifts, or to access equity. Important to recognize is if the move is voluntary and relatively low-urgency or being dictated by life circumstances.

4.  Secondary property purchases. Investment and vacation properties. This is the group who are expanding their portfolio. Usually, a buyer who is in a home they plan to remain at long-term and are looking either purely to invest in real estate with speculative and/or cash-flow upside, invest in a property they’ll get personal use or enjoyment out of, or find a property that offers both. Timing here is dictated purely by financial capability, and the urgency is determined by a combination of market conditions, priorities and capability of the purchaser and availability of what’s being searched for.

There’s an expectation by many that the cost of living could relax in a meaningful way, as a ripple effect of interest rates being raised to curb inflation. But I want to caution those believing this that there’s a difference between policymakers trying to rein-in inflation and stimulating deflation.

A couple of thoughts:

1. Overall, the population as a consumer base has largely adjusted (although it’s painful), to the current costs of most goods and services. And although some staples and everyday items fluctuate (such as eggs the past few weeks, or fuel in the second half of 2022), the costs of most goods have stabilized.  
2. With supply chains mostly being back to full strength, and most manufacturing back to the necessary levels to keep up with demand, the cost of most goods and services show few signs of dropping by amounts significant enough to noticeably impact everyday life.
3. The costs of virtually any goods and services are linked closely to wages (both in terms of what people can afford to pay for things based on their earnings, and in the opposite direction by what businesses can sell them for to remain viable or profitable). Wages seeing increases through COVID and now stabilizing has an anchoring effect on cost of living rising beyond what the general population can afford. And businesses finding the ranges they can charge as much as they can without seeing people take their business and to still be able to continue to pay its employees appears to be happening in most industries.
4. Recreational spending is slowing, but still strong. This suggests that although many households live month-to-month financially, there is still money circulating in the economy and keeping non-essential industries and businesses staffed. This is the main factor to watch as credit tightens and cost of living rises.

It’s human nature after such a long period where housing, although it was always expensive, jumps rapidly in cost that we assume it to be an anomaly. But the anomaly was the low borrowing rates rippling through to every household (lower prices and lower rates also meant lower rents, etc.).  The key going forward for households is to find housing arrangements and a monthly expenditure that is stable and, more importantly, sustainable without the assistance of borrowing to cover these costs. And although uncomfortable, most households are. More can be read about the cost of living in Canada (and its evolution) here: https://www150.statcan.gc.ca/n1/daily-quotidien/230117/dq230117b-eng.htm

We must adjust to the current cost of living because it’s unlikely to come down.

The term “recession” is misunderstood by almost everyone I chat with. And consciously or not, it’s impacting a lot of behaviour in the marketplace. There are technical definitions of what a recession is, but that’s for another day. What I want to touch on is how it impact what people are projecting the housing market to do. I chat with buyers daily. And I phrase I keep hearing is that most are “waiting for the market to keep coming down”.

I realize the main reason they say is hope. There’s a hope and a wish that the type of home they’re looking for with continue to drop in price until it reaches a range, they’re happy with. Funny thing about this is that, if you ask just about anyone, they’ll acknowledge this but are unable to tell you what that number is! Or they’re hoping prices continue to drop so much that what they really want (for instance; a detached house instead of a row home).

The second reason they might say this, and this one is funny to me, is that they truly believe they are outsmarting the entire market. When someone tells me they’re waiting to time the market till it reaches its bottom, I always try to politely point out that they probably didn’t time it well the last time (very few did, and most were lucky). They also probably didn’t time the peak (last March) perfectly. And the funny thing is, there are THOUSANDS of people all believing they’re going to time this ‘next’ bottom in the market perfectly. The irony is that when thousands of purchasers all decide while the market has reached that bottom, prices will likely already be going up due to competition between a high number of buyers for limited listing inventory. Sound familiar?

…A small thought for those who are REALLY hoping prices continue to fall drastically. You should only be hoping for this if you are in a completely recession-proof industry or are an investor with the cash to expand while still being able ride-out dry seasons. The market has already dropped 20%-30%, depending on location and property type. And for it to continue to drop at that rate would only be cause by economic issues, rises in employment and business closures that would impact most buyers in ways far more seriously than how good of a deal they can find on property.

The third reason is people don’t realize what happened last time we had a recession. Prices didn’t drop for three years or five years. They dropped for about a year, and then rose by healthy, steady amounts for the next 6 years in line with the economy’s growth. We’re already coming up on 1 year since the market turned downward and, although I expect they’ll drop for most of 2023 still, I personally believe prices have already done most of their movement.

Beware of Agents Who Are Saying “The Market’s Back”

There’s a popular feeling out there that interest rates will ‘come back down’. This feeling, I’m noticing, is the most common amongst people under around age 35. In other words, those who likely never owned assets before around 10 years ago and have never known anything other than low rates. This portion of the population also doesn’t understand the role interest rates play in the broader economy, and why we had rates as low as we did for as long as we did.  Although it’s possible you could see rates continue to be increased until the federal government feels it’s safe to relax them, it’s important that not just this age group, but all age groups get acclimated to rates being in the range or around 5% for a long time. And an overall struggle to believe this is evidenced by the number of property owners we’re seeing select 1-year or 2-year terms, feeling that they’ll have significantly better options in 1-2 years’ time.

The other mortgage-related factor is this. A huge percentage of the property-owning population has already been faced with adjusting its standard of living. With rates increasing over the past year, anyone on variable-rate loans has already been faced with payment amounts rising and shifting their spending and budgeting accordingly. This effectively eliminates most (if not all) of this group from the possibility of ‘needing’ to sell unless their personal circumstances change in a big way. The portion of the population enjoying the remaining 1-3.5 years of a fixed term will slowly be turning over and renewing, and I don’t anticipate a large enough group of that population needing to renew and being unable to within a small enough timeframe of one another to bring a ton of motivated sellers to market at the same time.

At some point, rates will be relaxed a bit, but only by a bit and not be enough to drastically change the type of home people can afford. Best bet is to plan the next 5-10 years of your life based on current rates.