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How healthy is Niagara real estate? It depends on what you read.

COMMENTARY BY JIM PITT Special to the VOICE T here have been a large number of statistical analyses regarding the housing market, debt loads and interest rates of late. It’s enough to make my head spin. But here goes anyway.
Follow the Money

COMMENTARY BY JIM PITT Special to the VOICE

There have been a large number of statistical analyses regarding the housing market, debt loads and interest rates of late. It’s enough to make my head spin. But here goes anyway.

A survey by MNP, a large accountancy and insolvency firm with offices all over, found that, "51% of respondents said they fear higher interest rates will affect their ability to repay debts, 43% of respondents admit to feeling the effects of already-higher rates and 29% said they have no financial breathing room after paying monthly bills.”

On top of this, nearly half, 47%, of outstanding mortgages are up for renewal this year at higher rates, as well as higher qualifying rates: 2% above the prime.

"Monthly mortgage payments are set to rise for a huge portion of people. But a staggering percentage of people say they already don’t have any wiggle room at all,” writes Grant Bazian, MNP President. Not to worry, though. It seems people are continuing to tap into the equity in their homes to the tune of $283 billion, up another 8% this past year.

Four in ten of these families are not paying back these loans and 25% make interest-only payments. It seems most of these people still believe that house prices only go up. They also believe interest rates will not go up. Interest rates have gone up three times recently and they will continue to do so.

Last week, one of the many Torstar-owned papers in the region ran a headline that stated, “Niagara home prices see double digit increases in Q1 of 2018.” The reporter goes on to qualify this by stating that prices actually went down by 0.47% in March, but that’s in the fine print.

The actual report from Royal Lepage was a nationwide take on the real estate market. The report mentioned Niagara in passing. It stated that prices went up nearly 11% from March 2017 to March 2018, not in the first three months of this year, as the headline implies.

Remax Garden City also released an analysis of the Niagara real estate market recently and it was an interesting take on what’s going on here. The analysis mentioned all of the headwinds facing the market of late, things such as (1) A rapidly appreciating market. St. Catharines rose 65% from January 2016 to April 2017. My calculations show a price increase of 58%, but that's only a 7% difference. (2) The Foreign Buyers Speculation Tax, although no mention was made of the number of foreign buyers that have purchased in Niagara. (3) Increased mortgage rates were mentioned as well as the stress-test for high ratio mortgages, indeed for all mortgages.

Then the report dove into the numbers. In January 2016, the average house in Niagara sold for $272,000. In Pelham the average house sold for $432,000.

In March 2017, the average home in Niagara sold for $377,000, an increase of 38%. In Pelham the average home sold for $469,000, an increase of just 8.5%. This in a period of rapid house price appreciation.

It is generally agreed that the market topped out a year ago April. The average price for a house then in Niagara was $453,000, and in Pelham it was $553,000.

Using these numbers we can deduce that the price of houses in Niagara and Pelham have dropped 16% and 15% respectively since last April.

The March 2018 averages are $401,000 in Niagara and $469,000 in Pelham. The report from Remax Garden City summarizes its analysis by stating that it believes the market is still undervalued and prices should rebound. I wouldn’t get too optimistic about these predictions.

The other factor mentioned is house sales and inventory. Region-wide, sales dropped from 866 in March 2017 to 619 this past March, a drop of some 28%. In Pelham, sales dropped from 38 to 17, March over March. That’s a 55% drop.

Listings have gone up 13% regionwide, but are about the same in Pelham. What to do and who to believe?

Any analysis from the real estate industry must be tested for bias in favour of continued high sales and prices. Large corporate newspapers rely on advertising revenue from the real estate industry—look at the size of those realty inserts. Those don’t come cheap. Happy real estate stories with the facts buried somewhere well away from the headline keep everyone happy, or so a cynic might theorize.

As of this writing, there were 1,004 residences for sale in Niagara and the average price was $401,000 in March 2018. In Pelham there were 45 residences for sale and the average price was $469,000 in March. If you want only an average-priced residence in Niagara, you have 186 at $401,000 from which to chose. In Pelham, you have three.

Doesn’t really sound right, but those are the numbers. Of course the asking price and the selling price are two different things. The real estate industry tells us what the seller wants for the house, but does not tell us what the seller gets for the house. That’s a secret. If you are in the market to buy a home, here is the 8-step strategy shared by my financial advisor, who is not in the real estate industry:

1. Get an agent to front you, but do not sign a Buyer Realtor Agreement of any kind. These were developed by the real estate crowd to benefit them, not you.

2. Suggest a reasonable price you think is fair and you can afford. Don’t overly low-ball; the seller might take offence and the deal will not happen.

3. Include lots of conditions, even if you don’t need them. Financing, home inspection water, and septic if in the country. You can remove them as negotiations move along and get a better price.

4. Don’t make the irrevocable too short. People under pressure don’t cooperate.

5. Never make an offer after the first showing. Go in two or three times. Build the drama. You can do this in a market with little buyer competition. Do not join a bidding war. If there is one, leave.

6. Big deposits help get lower prices.

7. Don’t be too quick with the sign-back. Wait until the end of the allowed period to respond. Let the seller remain uncertain.

8. If the negotiations fall through, take a few days or weeks off and try again. You could be pleasantly surprised.

Buying a house is time consuming and frustrating but can be rewarding. It’s the biggest-ticket item you will ever likely buy.

Last fall I wrote about a couple in the GTA that paid $2.25 million for a house that was listed at $2.0 million. Their agent told them to overbid with no conditions to win it. They did and then, a couple of days later, they informed the seller that the deal was off. They couldn’t raise the money.

The seller re-listed and sold for $1.77 million a few months later. The seller also sued the first buyers for backing out. Last week a judge awarded the seller $470,000—the difference between the agreed upon price and the final selling price.

Since last April there have been 866 buyers in the GTA who have backed out of deals. The sellers who have re-listed their homes have sold for an average of $140,200 less than the first deal they thought they had. Many of these “buyers” are in the initial stages of being sued for the difference. If there were no conditions on the original deal, they all will lose and have to pay the difference. Contracts are sacrosanct in Canada, as they should be.

Now I could be proven wrong. Maybe houses are set to sell fast and cost plenty more. But with all the headwinds mentioned earlier, and the fact that inventory is growing while sales are falling, I will apply the basic rule of supply and demand and predict that house prices are going to continue to fall, and that many more houses are going to be added to the inventory. So, if you are buying, you can try out the strategy above. If you are selling, you’d better hope I’m wrong.

It seems people are continuing to tap into the equity in their homes