Real Estate Values are going up. Here’s why.
I think real estate values are going to go up in 2021 here in London, Ontario, but also across Canada in general. Here are three reasons why I think real estate values will go up and it is going to start with something that we have talked about a lot, and that is
1. Supply and Demand
The reality is is that the supply just isn't enough to meet the demand. If we look back over the numbers, we actually see that on average we were selling about 830 houses a month here in the London and St. Thomas board. If we take some time and look at what the average number of listings, it's around 1,100 listings.
A ‘Healthy’ Market
One of the ways that we measure the health of a market is we look at the months of inventory that we have. Typically what we will say is if it's a seller's market it means that there's less than five months of inventory, and if it's a buyer's market it means there's more than seven months worth of inventory. If it's somewhere in between, we call that a balanced market, where there's equal opportunity for both the buyer and the seller.
We have a long, long way to go.
Definitely in the last couple of years it's been a strong, strong seller's market. And when we start to look at those numbers we actually see that we only had about 1.3 months worth of inventory on the market if we use that average number of listings. So, what would need to happen to our supply in order for prices to stabilize or potentially even decrease? Well, to hit that mark of five months worth of inventory, we would need to see our supply literally quadruple on average, if sales were to remain the way that they were in 2020.
So that would just bring us to about five months worth of inventory, and even there, it just means that prices are probably going to stabilize to hit that seven month mark and potentially see prices start to decrease a little bit. We have a long, long way to go.
Low supply going into 2021
So, I said that average number was actually around 1,100 homes per month that were active on the market, while actually at the end of December, that number was 430. So we're starting off the year very, very low heading into 2021, and as long as supply continues to stay that low versus our demand, the number of sales that we're seeing on average, then we are gonna continue to see prices climbing because we're gonna see buyers competing for the same property over and over and over again.
2. Historically Low Interest Rates
Part of this comes down from the government or the bank of Canada and its overnight lending rate which is passed along to the banks. At certain points we can find interest rates below 2% on a five year fixed-rate mortgage, which is just kind of crazy. The cost of borrowing is so low to borrow money. It's not free, but it's getting pretty darn close.
Cheap money adds to the frenzy
So when we have a market where demand is already high and then you couple it with cheap money, it just adds to the frenzy a little bit. By supporting the bank with low interest rates, the government can make sure that Canadians continue to borrow and continue to put money into the economy to try and support it, and that is why we continue to see more and more Canadians taking on more and more debt.
I'm not saying that's a good thing, but one of the things they're doing is they're taking on mortgages and buying houses because the interest is so, so low.
3. Monetary Policy
So the last point that I'm going to touch on, and it's a point that I saved to the end, because it's the point that I fully understand the least - the monetary policy coming down from the Bank of Canada. Even though I took a macroeconomics course in university, this is something that I feel like I hadn't had my head fully wrapped around.
Where is this money coming from?
If you were like me when the pandemic hit and you saw the government begin to dole out massive amounts of money, I started to question, where's this money coming from, and how are we ever going to pay it back? One of the folks that I've found online that has done such an exceptional job of explaining that and educating me is actually a fellow realtor out in Vancouver, British Columbia. His name is Steve Saretsky. You can check out his videos here. He does such a wonderful job of helping Canadians understand what the government is doing with your tax dollars and the money that they are borrowing, and how that affects the real economy.
How this impacts real estate values
The reality is that the government of Canada at the beginning of the pandemic made decisions to pump a bunch of money into the economy and essentially also increase the money supply - so the amount of money in circulation in our economy to try and keep the economy afloat. But their whole concern was obviously, as we saw, with our GDP contracting and people losing jobs, they didn't want our economy to really, really suffer, and potentially get to a spot where it took so long to recover from a huge recession or head into a deflationary market.
So what they did is they put all this money out into the economy, whether it was through CERB, or CEWS, or loans that were partially forgivable. Those are all measures that they took, but it came at an incredibly high cost because they are borrowing massive amounts of money.
Money is worth less
One of the things that happened is the Bank of Canada came in on the backend and bought government secured bonds. They're basically buying the debt off the government. So it's kind of like the left hand giving to the right hand, which I know sounds funny and takes a bit to wrap your mind around, but at the end of the day they have put a ton of money into the economy. And what happens when we increase the supply of money, each dollar slowly becomes worth less and less because there's more of it out there.
So we have a lot of folks out there that are looking at their dollars that are potentially sitting in savings accounts, or sitting in bonds or GICs and that are now returning less and less and less. They're looking at other asset classes that they can invest in that are more secure and are gonna appreciate more, and one of those asset classes is real estate.
This only adds to the already high demand out there, and when we couple that all with the low supply and low borrowing rates that we are seeing, it's kind of creating a perfect storm in the real estate market to see values continue to rise. I think that obviously we are gonna continue to see real estate values, not only in London, but on the whole across Canada, on average, values are going to continue to grow. We're predicting here in London that we could see anywhere from 8 to 12 or 15% increase in prices again, here in 2021. Last year those values came in around 18 to 20%.
There you have it, folks.
That is what I'm expecting for the 2021 real estate market. If you found that helpful, I'd invite you to hit that like button. I would also invite you to leave a comment down below, especially if you disagree with me. I shot a video like this a couple months ago and I certainly had a fair share of people leave comments that said it was a very self-serving video on my part. And the reality is is I want prices to stabilize just like everybody else does, I'm out there trying to buy real estate as well. That's it for me, and until next time, take care.