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May 2005
Is
the bubble about to burst? 
First point:
Is there really a question?
The media does get excited about house prices, doesn't
it? You can almost hear the glee in reporters' voices when they tell
their tales of galloping price increases and outrageous bidding wars.
But how close to the truth are the words? How hyped up are
they? How many times do buyers really pay more than they know
a property is worth?
And of late -- as though to counterbalance any overblown enthusiam
-- maybe the press is now unduly focused on the idea that everything
is about to explode. Perhaps buyers aren't in any great danger of
having to give up the homes they bought, but the prospect of people losing
their shirts does keep triggering some worked-up headlines.
Again, though, is it all true? Are prices about to drop 10,
20, 30 ... percentage points? Will people begin to rue the day they
didn't quarrel with an unbelievably high asking price and never mind
thousands of dollars beyond it? Are we, indeed, facing the almost
overnight collapse of the market that we experienced when the supply side
theorists took all the heat out of the economy (in the days of Reagan,
Thatcher, Mulroney, et al)?
Well, I don't mind sharing
some personal information with you to arrive at some perspective.
For instance, my wife and I bought a house here in Niagara-on-the-Lake
in 1975 for (gulp) $24,000. Ten years later we sold it for $54,000
and bought another one for about $60,000. Within five more years,
we sold this second house for $108,000 and moved up to one that was listed
for $198,000 but was purchased by us for only $177,000. We're still
here in this third home, which according to MPAC's latest assessment has
by now risen to a value of $235,000 -- although I think the most we'd get
is $224,000 if we wanted it taken off our hands.
I'm quite sure that this
experience of ours isn't much different from that of innumerable other buyers
and sellers over the past thirty years, including the most recent
decade. So suppose we see what can be made of the figures.
The overall effect is that we've seen
prices rise $200,000 ($224,000 less $24,000) in 30 years, which is a significant
increase but comes down to around $6700 per year or, if you wish,
about a shade less than only a 3.5% annual increase on our present property
value.
Between 1975 and 1985, we came out $30,000
the richer ($54,000 less $24,000), which means $3000 per year.
In the next five years, we did much, much better: $108,000
less $60,000, divided by 5 = $9600 per year. (This -- thank you
very much -- was a short time prior to the entrance of Mr. Mulroney &c.)
And in the most recent ten years, we've seen $177,000 move up to
$235,000 (okay, let's give MCAP the benefit of my doubt), so we've been
"making" $5800 per year (a drop to what becomes a mere 2.9% annual increase).
It is, of course, all very nice if you can get it -- EXCEPT
for one point that the figures don't reflect, which is our interest in
buying a somewhat bigger and better house each time. Which is not
much different from what our fellow buyers and sellers have been doing since
the 70s, is it?
So is there a bubble
and is it about to burst?
Second point: What's happened during the past three years?
In July 2002, I struck out on my own as an Exclusive
Buyer Broker (which means I no longer do any listing, but work solely for
buyers), so I can now look back on a reasonably lengthy and focused period
of time in which I've been able to recognize what prices buyers are willing
to pay for properties that take their fancy.
Sidestepping my commitment to steering people away from anything
that isn't good value, I haven't so far put an offer together at the asking
price, let alone at any figure above it. I don't mean that I've been (much
of) a party to some hard bargaining. Rather, my aim is always to
end up with a Win-Win sale and purchase, which is what most (good) agents
believe is the best possible way to negotiate a real estate transaction.
It has not, however, been my experience that the buying public will
simply pay whatever a vendor or listing agent thinks (or hopes) they will
(or should). Admittedly, from the outset I talk to people about
the importance of getting "the most house for the money," but I also find
that potential buyers are, in any case, invariably keen to find out
what else can be bought and/or has been recently sold for the price that's
being asked of them. If a listing price is out of line with the market,
any offer that's made will certainly incorporate an appropriate correction
and there'll be scant interest in agreeing to a sign back that's unwilling
to acknowledge the need for one.
So have people been
paying more than they should? Have prices been inflated to any abnormal
degree? And are new buyers coming onto the market going to want
to pay -- or even make any attempt to pay -- a whole lot less than recent
purchasers have done?
None of it seems likely to me.
Third point: The Bank Said No!
Less than a month ago, the Toronto Dominion Bank not
only shot down the predictions of a market collapse, but largely dismissed
the thought that a bubble exists at all. A report issued by
its economics division argued that a steady upsurge in demand is the primary
cause of recent upward price movements. Low interest rates, favourable levels
of housing affordability, and a generally limited availability of
suitable properties have put pressure on prices but only to a healthy rather
than any alarming degree. Indeed, the forecast is for some cooling
off in the market this year. In part this is seen as a reaction to
small interest rate hikes, but it's also due to some expected resistance
to higher new home prices caused by rising material and labour costs.
Moreover, there are few signs of speculation, which has long been
seen as the cause of housing inflation. There are only occasional
chances nowadays of making money by buying and reselling houses. People
are now buying for the long haul -- if only because they don't have much
else of a choice!
Maybe the banks don't always tell us what we want to hear.
On this occasion, though, I don't think we have any reason to be upset
by their opinion, let alone to quarrel with it.
Do you?
Fourth point: Not In Our Backyard
It has to be admitted that isolated areas in both
Canada and the USA have witnessed excessive rises in the cost of buying,
not to mention owning, a house. However, most market watchers --
with journalists probably being excepted! -- see nothing worse than a softening
from hereon, accompanied by a length of time before people will be able
to profitably resell what they've recently bought.
More to the point, though, the Niagara Region as a whole and for
some long time has avoided sharp price hikes in either its new or resale
properties. At most, buyers have often needed to take a fast look
and make some sudden decisions, because listings have tended to move quickly.
The leisure of being able to sleep on something has more than once led
to a rude awakening, because the house has been suddenly bought by someone
else.
There's also, at least on the basis of all that I've been able to
see, a steady and stable market in just about every Niagara community.
People can -- and will -- buy continuously, but there's nothing in the
way of a foreseeable panic. Some prices will go up and others
will come down, but there's no good reason for thinking that there's a bubble
in our part of the world.
So what is there to burst?
Perhaps, ha, ha, just the ballons that journalists sometimes put
up to help sell their newspapers!!
Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: E-mail
addressed changed as above on Nov 3 2007
website: http://www.duncanpollock.com
PS. One
of my web pages provides a list of the other newsletters I've sent
out. If you choose to go to it, you can click on any title to bring
up its full text.
PPS. I've recently been invited and encouraged to create a
second website, one that deals with my approach to the industrial, commercial,
and investment real estate market. You can reach it, if you're so
inclined, at http://www.iciniagara.com.
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