The graph below was part of an email I received a couple of days ago. It is from this month’s summary report of the Real Estate Board of Greater Vancouver. (Note this does not include the Fraser Valley Real Estate Board, or any others further inland, but their stats would tell a similar story.)
It does not take a genius to figure out that it is telling quite a story, one that is not good news for people who want to get into the housing market.
The graph itself may require a little explanation, though, for the non-geniuses amongst us.
Let me explain:
– The graph is NOT a graph of housing prices; it is a graph of listings-to-sales ratios;
– You can see a significant upward turn starting in June, 2020, when things were just beginning to be opened up from the first wave of covid19, and that trend has not reversed; except for a little summer slump last year.
– You can see a huge upward surge in late 2021;
– If you look carefully, you can see that, when sales are less than 12% of the number of properties listed, it is a “Buyer’s market.” That means there are enough properties on the market that the Buyer has plenty of choice and hence, some control. They can shop around, and likely get a good deal;
– When sales are between 12% and 20% it is considered a “Balanced market.” This means there is a good match between the number of properties available and the demand for purchasing those properties. Buyer and Sellers will both get their fair expectations from the market. Prices will probably appreciate in line with inflation;
– When sales are above 20% of the number of listings, it is a “Sellers’ market”. Buyers scramble to find properties and Sellers can get more than the modest inflationary price increase for their properties;
– You can see that in late 2021, the ratios soared to nearly 100% for townhomes, 65% for condos, and 36% for single family homes.
Ultimately, it is all about Supply and Demand. Demand should be between 1/8 (12%) and 1/5 (20%) the amount of Supply to keep the market “balanced.” The graph supports what the experts have been saying: We are not so much in a housing bubble as in a shortage of supply. We need to greatly increase our housing stock.
So, despite this graph not being about prices per se, prices are still highly influenced by these ratios. With listing/sales ratios over 50%, panic buying sets in by those desperate to get properties at any price. Therefore, prices soar!
I experienced this personally last night. A condo unit a few doors down from me came up for sale. It was a great rental property, I thought. At $249,900, it was listed a bit high in my opinion, but I did the numbers and it still worked out OK.
But I was not going a dime over $250,000. Even at that price, I was a bit nervous, as the highest price any similar unit in my building had previously sold for was $208,000, and that was in the first half of 2021.
I did not get the property. When the deadline came last night, there were 20 offers. The Sellers accepted one for $304,000 that came subject-free (which means an instant “done deal,” no waiting for financing, inspections, appraisal, etc.) I was shocked!
What does this kind of market behaviour mean for rent 2 own? Is this a good time to get into a rent 2 own contract?
First, it means it is very tough for us to buy properties. We have to beat out other offers without getting into a bad investment. But it is not impossible, just more challenging. Not all are as ridiculous as the one last night.
Second, it means that, the higher the prices go, the less of a property you will qualify for. A $90,000 income could have qualified you for a single-family home in the Fraser Valley just three years ago; it could have qualified you for a decent townhome or a beautiful new 3-bedroom condo just a year ago; it will probably only qualify you for a 2-bedroom condo or perhaps an older 3-bedroom condo today.
Third, because a rent 2 own program secures your future purchase price at only a modest appreciation amount, it may be a good time to get in before prices get completely out of your range and secure a price that may turn out to be an exceptionally good deal when you get title.
Fourth, rental rates have to correlate somewhat with property prices. They will rise with the rising prices of the properties. (If the purchaser of the property I lost out on last night intends for the property to pay for itself, they will have to charge much more in rent than I was planning to charge for the rental . . . and so it goes).
Fifth, with prices skyrocketing, more and more landlords are selling their properties to make room for new developments, or simply to cash out. Will you be kicked out, as so many have been, to look for a new rental that is almost non-existent and virtually unaffordable. Landlords cannot raise rents for existing tenants more than the annual amount prescribed by government, but they can charge new tenants whatever they can get.
Ultimately, you have to weigh the odds. Should you sit tight, so that your rents cannot go up much? What if you get evicted for redevelopment or sale; will you be able to afford the new rent that will be much higher? What will happen to housing prices over the next while? Is it time to lock in a future purchase price through rent 2 own, or hope that prices come back down before getting into the market?
No one knows what will happen in the future. While the government talks about putting the lid on rising prices, economists doubt they will have much success because of the supply challenges.
But one maxim seems to hold true in almost any economy: those who wait generally lose out to those who grab the opportunities available.
Or, as the birds have proven: “The early one gets the worm.”
At least, that’s how I see it . . .