A Buyers Market Is Coming!

It’s normal for the spring housing market to be busy. It is every year. But it hasn’t just been busy. It’s been out of control crazy!

Spring is usually an enjoyable time to shop for a new home. In today’s market however, many are finding their enjoyment to be short lived as they continually find themselves being outbid in their search for their dream home. The enjoyment suddenly turns to frustration.

What Led To The Red Hot Real Estate Market

The market was hot in early 2020, however once it became clear that we were in a pandemic, many put the brakes on their home buying plans. While buyers were withdrawing from the market, so were sellers. As the future of the pandemic was uncertain, the majority of both buyers and sellers chose to wait to see how it would unfold. These buyers and sellers did not disappear. They were just holding off, which resulted in a short opportunity for those most eager to buy. With so many sitting on the fence, pent up demand continued to build. It was only a matter of time before the market began to soar, which I predicted in my blog from May 13^th, 2020.

But it wasn’t just pent-up demand that led to the hot housing market.

The pandemic has kept everyone from traveling, going out to restaurants, attending concerts or sporting events, or even gathering with friends and family.

What else was there left to do?

Nothing stopping us from shopping for a new home, so with nothing else to do, why not look at making the move?

It’s the combination of pent up demand and boredom that has led to the insanely hot housing market. This why the housing market has been so crazy lately.

Why The Real Estate Market Is Slowing

As summer begins, the housing market starts to slow. This is a typical pattern each year, however this is anything but a typical year. With the lockdown ending, everyone is excited to get back to doing the things they love, which leaves less time for home shopping.

It’s the combination of a seasonally slower time of year and people taking advantage of everything opening back up that resulted in the slower housing market.

Note that slowing does not mean that demand has stopped. It’s still strong, and multiple offer situations are still common. Not all properties are going into multiple offers however, and of the ones that are, there are fewer offers to contend with. We’re now seeing some properties sitting on the market, which may come as welcome news to those who may have been having a hard time getting their offers accepted.

Will Real Estate Prices Drop?

For reasons mentioned above, I expect to see the market slow further over the next couple of months. This will result in real estate values dropping over the summer, which will create an opportunity for many who feel they may have been shut out of the market. How much will they drop? That part remains to be seen, but I think a 10% correction or even greater is possible. 

The real estate market is cyclical. There will always be hot periods, and there will always be corrections. The last correction was in 2017 where home values dropped roughly 20%, before the market become hot again shortly thereafter. I would expect something similar over the next couple of months. It may not be as much as 20%, but it’s not impossible either. 

In April 2017, home values peaked with an average sale price of $920,791. In December 2017, the average price fell to $735,021. Despite the decline, the average home price was still up from $730,125 a year earlier according to the Toronto Real Estate Board.

What If You Bought At The Worst Possible Time?

If someone bought at the worst possible time in April 2017, it would have taken just over three years before the value of their home climbed up over what they paid for it. In April 2017, the average sale price was $920,791 as mentioned above. In June 2020, it was $931,085. Almost a year later in May 2021, the average price was $1,108,453, up $187,662 over what they paid for it in 2017. Still not a bad return considering the home was purchased at the worst possible time. What other investment would turn this kind of profit in such a short period of time?

The buyers wouldn’t have lost a single penny unless they sold their home in the first three years.

Should You Wait Before Purchasing A Home?

Similar to what I predicted in spring of 2020, there is another window of opportunity for buyers before the market takes off once again…and it will. Just as there was pent up demand for real estate, there is now pent up demand for immigration to Canada. This will create a new demand for housing, which will cause the market to spike once again.

Canada is expected to welcome 401,000 new immigrants in 2021, which would tie the record for the most immigrants in a single year which was set back in 1913. By comparison, there were 184,000 new immigrants in 2020. Even with these lower numbers, the real estate market was still hot. Canada plans to get even more aggressive with immigration of the next two years. These new Canadians will of course need somewhere to live, which will create further demand for real estate.

As I expect home values to fall, I’m thinking the best time to buy will be starting in August through to the early fall. You need to be careful though. You’re not trying to get in when prices hit their absolute rock bottom. Everyone wants to, but no one knows when this will be. If you’re lucky, you’ll get the timing perfect, but it would be pure luck. That’s it. If the time was predictable, then you’d have an unbearable amount of buyer competition and it would be almost impossible to get your offer accepted. You want to get in ahead of the next mad rush of buyers.

I would not be afraid to buy if prices are still falling. In fact, that might be the best time to buy as you’ll have less competition. The market will pick up again, it’s just a matter of when. If you wait too long, then you may miss the boat. If prices continue to fall after you buy, it would only be temporary. You have not lost anything unless you need to sell right away. You’re purchasing a place to live, a home for you and your family. This isn’t a stock where you’re looking to make a quick return. It’s your home.

Risks Of Buying A Home In a Declining Market

The biggest risk when purchasing a home in a declining market is when an appraisal is required, which is common. I would say that 199 times out of 200, the appraisal comes in for the purchase price. Even in a declining market, appraisers will try to reach the purchase price.

When we bought our condo in 2019, I was sure we were paying $50,000 over market value. We had 15 other offers to compete with, and we were frustrated from being outbid for the past two years. We were comfortable with slightly overpaying if we needed to. The appraisal however came in at the purchase price. All good.

Appraisers will always look for ways to reach the purchase price, however there are times when they are not able to support the value. Should this happen, then you would need to come up with the difference between the appraised value and the purchase price. This is not a concern if your down payment is already large enough to cover the difference. It’s more of a concern for those putting only 5% or 20% down payment. I speak about this in detail in my blog on What Happens If Your Appraisal Comes In Low?   

Conclusion
Keep in mind that this is all speculation and anything can happen. I believe a correction over the next few months is the most likely scenario, as there is evidence to show that it’s coming. Nothing is certain however. It’s still possible that we may only see a marginal dip. Or values might just level off. No one knows for sure, and anything can happen. For now, all we can do is speculate based on the information we have available today. In either case, a buyer opportunity awaits.