2022 In Review: Beeswax Wings and Rough Landings

You may have inferred, the title above is referencing the ancient Greek tale of Icarus, and if not, let’s talk about him!

The story of Icarus is pretty well popularized in the common phrase “flying too close to the sun,” which this gentlemen did. He fashioned some wings with beeswax, flew too close to the sun, the wax melted, the wings fell apart, and he fell to a depth life cannot return from..

While resale value certainly soared to great heights in 2022, they also certainly fell back to the price points they flew from. Unlike our protagonist Icarus, residential resale is not 6 feet below, but those peak inflation prices of 2022 are.

Let’s talk about the flight of real estate prices in 2022, by starting in the Summer of 2021.

In July of 2021, the average price for your typical home was $672,328, which increased to $825,221 by January 2022. The increase in price per month (averaged) beginning in July 2021 up until January of 2022 was 4.6%, the greatest of these leaps being between November and December of 2021 at a 10.8% increase in resale value. The combined percent increase in resale prices from July 2021 to January 2022 was 27.6%. (MLS).

Homes consistently increased in value for these 7 months in a row, whereas the months prior there was some fluctuation typical of seasons. Typically we see lower sale prices around December and January with holidays taking priority and see prices go up around February and March in the “Spring Market.” People also prioritize resale and residential goals once September hits. Kids are back to school, summer vacations are over, and the back-to-routine period lets families, couples and other buyer demographics schedule in house-hunting and listing as a priority.

We also saw 7 consecutive increases in interest rates in 2022 with another occurring this year on January 25th, 2023. Rates were at a low of .25% in March of 2022 which increased up to 4.25% by December 7th 2022. The overnight rate now sits at 4.5%. Inflation had reached a 30-year high of 8.1% in June 2022, which cooled to 6.3% by December 2022. The goal is to bring that number down to a 2% target, which is expected to be reached possibly sometime in 2024.

A big factor in inflation was undeniably the Corona Virus (Covid-19) Pandemic and measures being imposed at large globally and domestically. The beginning of 2022 saw a hot sellers market in which we had limited supply in housing in contrast to buyers, of which many were coming into London and Middlesex regions from the GTA who were now encouraged or mandated to work from home. Relatively speaking, London and Middlesex prices are much more affordable and it was very affordable to borrow. We saw most homes entering into bidding wars within a week of listing and going significantly over asking for several months. Buyers had to be prepared to be in to show first if there was no Form 244 holding off offers, and pay significantly over to beat out potentially 3 or in extreme cases 30+ other offers when offers were held off! Yikes!

Since the peak of the hot market, the consecutive increases in the overnight borrowing rate have significantly affected buyers’ ability to borrow and carry mortgages. According to Ratehub.com, if a homebuyer puts down a payment of 10% on a $748,450 home in January 2022 and got a five-year variable rate of 0.90 per cent amortized over 25 years, the buyer’s monthly mortgage payment would’ve been $2,585 at the time. As of December 7th, 2022, they would be paying a mortgage rate of 4.9% with a monthly payment of around $4,000. That’s up $1,415 monthly with a total cost of $16,980 stretched out over a year (Global News, “Housing Affordability”). These increases affect variable mortgage holders and new home buyers the most, and have also pushed a significant portion of the population into renting, downsizing and/or relocating.

International conflict including the war in Ukraine also affected supply chain outcomes here in Canada and internationally. However, according to David Laidler, a professor emeritus at the University of Western Ontario with several published works on monetary policy, ”By in large what I would say is that the inflation we’ve got has its roots in the policies to deal with the pandemic,” not necessarily as significantly due to the the war in Ukraine (TheStar.com, “How much is inflation in Canada being driven by Russia’s war in Ukraine?”).

Supply chain complications, had they been affected by international crises and/or the global and domestic responses to the Corona virus pandemic, certainly manifested in the low inventory and high pricing of new-build properties and developments in 2022 and 2023.

While our provincial government has members at the table discussing how to invest in and invigorate the current supply issue with bills including the Built Faster Act with a goal of building 1.5 million homes over the next 10 years, critics have pointed to a secondary factor affecting home ownership being the issue of affordability. Further, critics have also addressed Doug Ford’s previous promise to safeguard the Greenbelt, which is approximately 2 million acres of protected land (read more on why at GreenBelt.ca), which the current provincial government now intends to develop with 50,000 homes (Global News, “Greenbelt is Ontario’s jurisdiction, Ford says after federal minister raises concerns”).

In summary!

Prices have returned to early 2021 and late 2020 prices generally speaking in London and Middlesex.

Some owners were still holding out for those high numbers well after we saw consistent drops in the market, however sellers have started to come around and negotiate with buyers before waiting too long. We see more conditions on Agreements of Purchase and Sale including home inspections, acquiring financing, and even a solicitors review of the offer before agreements are firmed up.

At this time, I do suggest buyers include that condition of financing! While no seller generally wants a loop hole present in which buyers can back out of the deal, a condition of financing not only ensures for the buyer they can close on the property and fulfill the terms of the agreement, it also benefits sellers in which they can have better assurances that buyers are doing their due diligence to ensure properties WILL go to close and time is not wasted on a possible breach of contract. Pre-approvals change with each new interest rate hike, so buyers should be as currently informed as possible with their lenders anyway!

According to the London and St. Thomas Real Estate Association, the benchmark home price in December 2022 was $612,770, which came down 14.5% in value from December 2021, however it increased by 10.5% since December of 2020 (LSTAR.ca, “London and St. Thomas Residential Market Activity and MLS® Home Price Index Report December 2022”). Long-term homebuyers have certainly built up equity or have fully paid-out mortgages over the years if they weren’t cash buyers to begin with, even given the wild fluctuation on residential resale over the last year and change. On the other hand, home buyers who bought during the height of the 2022 inflationary period may want to hold off on listing just yet.

References:

“Ontario Housing Market Report.” WOWA, January 23, 2023. https://wowa.ca/ontario-housing-market

“Bank of Canada Interest Rate.” WOWA, January 25, 2023. https://wowa.ca/bank-of-canada-interest-rate

Lord, Craig. “Interest rates have soared in 2022. Here’s how much more you’re paying to borrow.” GlobalNews.ca, December 7, 2022. https://globalnews.ca/news/9332468/bank-canada-interest-rates-2022-debt-mortgage-payments/

McNutt, Lydia. “Housing Affordability in Canada: 2022 RE/MAX Report.” Blog.RE/MAX.ca, July 20th, 2022. https://blog.remax.ca/housing-affordability-in-canada/.

McKeen, Alex. “How much is inflation in Canada being driven by Russia’s war in Ukraine?” TheStar.com, April 20th, 2022. https://www.thestar.com/news/canada/2022/04/20/how-much-is-inflation-in-canada-being-driven-by-russias-war-in-ukraine.html?rf.

“Global material supply and price issues continue to impact Canadian builders and home buyers.” CHBA.ca. https://www.chba.ca/CHBA/BuyingNew/Supply_Chain_Issues/CHBA/BuyingNew/Supply_Chain_Issues.aspx?hkey=1a72a3dc-f228-4068-a406-110c0fd59683.

Chavez-Gallardo, Emily. “Ford Government Introduces Legislation to Help Build More Homes Faster.” Realinsights, November 27, 2022. https://www.gta-homes.com/real-insights/news/ford-government-introduces-legislation-to-help-build-more-homes-faster/.

Jones, Allison. “Greenbelt is Ontario’s jurisdiction, Ford says after federal minister raises concerns.” GlobalNews, January 27, 2023. https://globalnews.ca/news/9442044/ontario-greenbelt-ford-federal-minister/.

London and St. Thomas Residential Market Activity and MLS® Home Price Index Report. https://www.lstar.ca/sites/default/files/pdfs/Monthly%20MLS®%20Statistics/December%202022/Residential-Market-Activity-Report-for-LSTAR-December-2022.PDF.