Wednesday, August 15, 2007

Where is the market heading? In light of increased mortgage interest rates.


I received another email question today and thought I would post my long-winded answer below and share my thoughts with you too.


Enjoy! Mark

The question was:


Just wondering what is happening in the market after interest rates went
up.

Is there a lot of Townhomes on the market and are prices coming down.
Just wandering if is a good time to invest again.

Thanks

A.

Here's my answer:


Hi A.,

The market is quite fast these days. Normally, it slows down in the summer, but this summer has been quite active. Average prices are down a couple of percent which is typical for this time of year, but the volume of sales is hitting records. See the link below. Normally there are about 40-50 townhomes in Erin Mills for sale at any one time, but there are only 34 right now and many of them are conditionally sold.

Yes, this is a very good time to invest.


I realize the rates have increased but only marginally and it will likely only be short term. We are going short on all of our mortgages, time proves short term is by far the better option, see here, of course probably until I follow that method! :-))

There are not too many major scenarios that will cause real estate market to tank. One scenario is major global catastrophe or war or terrorist act. All could cause sudden and major drop in market, but the stock market would take a huge hit too. So would our entire economy, so all things being equal, anything major will affect everything, so real estate should still be a good long term investment. Time has proven real estate will recover and then some, so I am not worried, besides, it would just mean we get less rent, if we don't have to sell, all is fine, but more properties!

Another thing that could happen is that interest rates continue to climb. Once they reach 7 or 8 percent the economy will slow and then rates will stabilize and/or come down again. This may only last a year or two and then the economy will settle down again. Increasing rates certainly cut out the very bottom entry level buyers, but there seems to be enough buyers out there to sustain and continue to cause prices to rise and record sales month after month.

Another possibility is the US economy continues to be bad or gets worse. Although it used to be that "if the US got a sniffle Canada would get a cold or the flu", no longer seems to be the case. Our marketplace in the GTA, Ontario and Canada seems to have been insulated from events in the US since about 911 and seems to be able to sustain itself regardless of what happens to our friends south of the border.

Oil prices rise to $100 or more per barrel. Again, yes, this will have an impact on our marketplace, but maybe only short term. The demand for gasoline seems to be completely inelastic, regardless of how high gasoline and oil prices rise, we still drive large vehicles and conserve very little. We may complain like hell about the price at the pumps, but we pay it and keep driving.

US election years have almost always caused our market to slow, EXCEPT in 2004. Thus, it's your guess whether our market and economy slows next year or not.

Un-Employment rates rise, due to dollar, economy or overseas markets could cause our market to slow, people spend less money and the economy stalls, again, this would affect all markets, not just real estate.

Another scenario is that the baby boomers all get old in the next ten years and sell off their real estate and/or give it to their kids who cash out. Either way, if a flood of listings were to come on the market it could affect our prices in the short and long term. Personally, this does not worry me. There seems to be enough people out there to absorb any increase in inventory, but only time will tell on this one. I believe it will be much more gradual than people think. Fractional ownership worries me more than the boomers cashing out. I may be wrong on this and I've not researched the success or failure of fractional ownership in other parts of Canada or the world, but if time shares are any indication, I think that this may hurt more people than help them in the long run.

At any rate, these are some of the scenarios that the doomsayers are predicting and hopefully none of them will come to fruition and even if they do, I feel they will have less impact on our real estate market than some think.

There are other possible scenarios, I would like to hear your feelings and ideas, but these are some of the major reasons for large price swings in the market in the past and could be for the future too.

If history repeats itself again this fall, prices will likely escalate again in mid to late September until middle of November, see the graph here, so make your purchase soon or wait until December 10th to purchase and hope there are some listings on the market at that time that you like!

In summary, and I know it sounds corny, I still go by the old adage that the best time to buy real estate is yesterday.

Thanks,
Mark




Toronto Real Estate Board (TREB) Average Prices and Graph

For more information please contact A. Mark Argentino

A. Mark Argentino, Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc., Brokerage
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS. 905-828-3434
FAX. 905-828-2829
E-MAIL: mark@mississauga4sale.com
Website: Mississauga4Sale.com

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