The conventional wisdom is that the real estate market in Ontario (read in the GTA) is being driven by first-time or entry-level buyers leaving apartments and making a purchase. The entry-level buyers are pushing an entry-level owner up to a modest home, which pushes a modest home-owner up to a larger less modest home or one in a better location. That pushes another owner up to a higher-priced more prestigious home, or out into a comfortable retirement property out in the country. Supply and demand; As a result, prices rise at all price-levels as buyers at all levels compete to get the properties they want. The entry level buyers are coming out of apartments or rented houses. The historically low interest rates on mortgages are allowing them to buy a starter home for a monthly loan + taxes payment comparable to the rent they were paying. CMHC is backing buyers who have no money for a downpayment. Banks are loaning them the legal/closing costs too, essentially letting buyers finance 105% of the cost of the house. (Who's profiting from this brainwave? That's a whole other discussion.) Supply and demand; As a result, more buyers making offers pushes starter home prices up. At some point though, prices on starter homes rise to the point where fewer and fewer entry-level buyers qualify for their mortgages. Then it is no longer a monthly-payment sideways-shift for a renter to become a homeowner. It suddenly is more costly to own, and fewer renters are able to make offers. Supply and demand; As a result, fewer buyers mean starter home prices go down. When sale prices are plotted on a graph, they have been increasing steadily at all levels of the market, bottom, top, middle. Entry-level buyers have been able to power the market through this part of the cycle. Real-estate markets move in a sine wave though; up and down across a relative median price range at all levels, with that price rising with inflation over the years. My theory is, if starter-home prices are plotted on a graph, they will rise as buyers continue to be able to buy and power the market, but they will ripple when the market is in danger territory. Starter-home or entry-level home sale prices are the canary in the coal mine. Here's how: During those periods when interest rates rise, they will push monthly loan payments higher and out of the range of the majority of entry-level buyers (renters.) Sale prices for those entry-level homes will drop because fewer buyers will be making offers, or even be looking. Supply and demand; prices fall. When prices fall back, more entry-level buyers will qualify for the mortgages again. Even though interest rates are the same, price X interest = lower monthly payments. That pushes the marginal buyers back into the market. Supply and demands; As a result, more buyers, more offers, prices rise a bit. Higher sale prices mean higher asking prices, which pushes those marginal buyers back OUT of the market. They can no longer make the monthly payments. As a result, fewer buyers, fewer offers, lower sale prices. On that sale price graph, there should be a ripple effect in starter home sale prices when the market reaches this stage. That's significant because, remember, those entry-level buyers are pushing the rest of the market above it. When they talk about the bottom falling out of a market, this is the bottom they are talking about with respect to real-estate. The bottom end buyers are no longer there to buy the entry-level homes and power the market above it. If sale prices on entry-level homes reach the ripple point it does not mean that the market is about to crash. Prices could ripple, for a long time, at all higher price-points as a result; a kind of butterfly affect. It would mean an end to the rapid price increases we've seen, and a more sensible market with prices that keep up with inflation, i.e.; the kind of real estate market our parents, grandparents, and their parents were accustomed to. The worry is, the ripple is the signature of a fragile market. A small injury can shatter a tea-cup. Bankers think with their cheque-book. Real people think with the brain that keeps them awake at night worrying about the layoffs at the plant next door, or the extra $100 a month gasoline is costing, or their parents' moving into a nursing home and signing over their inheritance, or the latest terrorist attack on our continent. That's the danger, if there is a ripple. So, having blogged on about this, you're expecting me to tell you if there is an entry-level ripple now. If I was a manipulative Realtor I'd say I only tell that to my clients and tell you to send your name and address. Being an honest Realtor, ( the reason my clients like me) I'll tell you that I have to do a TON of research to plot those prices over this booming market and determine if they have rippled or are about to, or not. Once I've done it, and proven my point, I'll be on TV talking about it! But I'll share it with my MoreForMyHouse.com friends first. Stay tuned! P.S. Any economist's opinions are welcomed.
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