HRM Real Estate Year in Review | Fear and Volatility

The real estate market in 2022 was volatile. A cataclysmically low number of homes for sale in January caused real estate values to skyrocket.  It was almost impossible to determine what a house would sell for. A house may have sold a week or two ago, but then a similar house in the same area a week or two later may have fetched an additional 40-50K. You were competing against 15-20 other people and bids were inflated to ridiculous levels. In many cases, offers were also being submitted without conditions to protect the buyer.  It was a nightmare and one I am glad to say is over.

During the insanity, the bank of Canada decided to get involved to calm things down (while the media simultaneously made everyone panic).  Interest rates started their relentless upwards march and by the end of the year, we saw sales decrease by 27% year over year. As well, the average price of a home dropped by 15.5% from the peak.  A terrible market? Well, not really. While the average price dropped 15.5% from the peak, it was up year over year by 3%. While sales dropped by 27%, the number of new listings dropped by 11%.  Seller’s on average, were able to obtain 99% of their list price. Demand was still strong and to explain this, I need to bore you for a second with a quick recap on “months of supply.”

Months of Supply

Months of supply is the amount of time it would take for us to sell all our inventory if nothing else were listed.  For example, there are 90 homes on the market and we sell 30 homes a month.  We would have 3 months of inventory (90/30=3).

0-3 Months - Seller’s Market - Upwards Price Growth

3-6 Months - Balanced Market - Stable Prices

6+ Months - Buyer’s Market - Downward Price Pressure

At the end of 2022, we were sitting with 1.6 months of inventory (seller’s market).  For some perspective, we had 3-4 months of inventory throughout 2019 and prices grew 9.5% that year.  Literally no one complained about the market in 2019, but now everyone is terrified.  Why?

Uncertainty brings fear.

Rising interest rates certainly caused concerns regarding affordability. This was also at a time when a trip to the grocery store meant the need to apply for a medium-sized line of credit to buy a stick of butter. Beyond that, the uncertainty of how high rates would go caused a significant number of people to take a step back.  How high would the interest rates go and how would it affect real estate values?  The average price has remained largely unchanged for the past four months and we are likely near the top of the government’s rate increase program. It is quite likely we are at or very near the bottom for home values.

So, what happens next? 

When the uncertainty subsides regarding interest rates, it is going to become quite clear to everyone that we still have an inventory problem.  At 1.6 months of supply, we are well into a seller’s market where there’s upwards pressure on prices. Rental vacancy rates are at an all-time low and the federal government just banned foreign buyers.  This means foreign students will have to rent in an already competitive market.  In addition, more than 28,000 people moved to Nova Scotia between June 2021 and June 2022 – the next highest year on record saw just 11,000 new residents.  I expect many people who sat on the sidelines during the rate increases will start to ponder getting back into the real estate market.  We are gripped by a housing crisis and the only way to correct that is by building more.  Unfortunately, I don’t think we will build fast enough to keep up.  

While you are here

We thought it might be a good time to talk about how interest rates impact your payments in today’s market.  Check out the affordability scenario below.

Affordability Scenario – The New Normal

Let’s assume we purchased a $600,000 house in April when interest rates were approximately 3.5%.  We put 10% down and amortized the mortgage for 25 Years.

Based on the statistics and an average price decrease of 15.5%, that same house in December might now be worth $506,768. With the same terms above and today’s interest rate of approximately 5.9% .

A comparable house today will cost you $200 a month more than it did 8 months ago.  Certainly more, but perhaps not as scary as it sounds when you hear interest rates have doubled.

Considerations for 2023

Migration:: 28,000 people moved to Nova Scotia between June 2021 and June 2022. The next highest year on record was 11,000.

Inventory: Despite a 27% drop in sales, our Months of Supply still represents a strong Seller’s Market. Lack of supply and strong demand.

Rentals: The rental market is more competitive than ever, as more people recently have opted to rent versus buy.  

Foreign Ban: Foreign students no longer have the option to buy because of the 2 year federal foreign buyer ban.  This will likely add even more pressure to the rental market.

Remote Work: Working remotely is still very much an option for a lot of people.  Big city wages with real estate that is less than half as expensive as big city markets.

Home Values: For now, real estate prices are more affordable than in the summer. It is likely people in the rental market will transition back to buying a home.  

Sticker Shock: Once the psychology of interest rate “sticker shock” subsides and rates plateau, the principles of supply and demand should be the main factor that dictates our market.

HaliPad Outlook: We expect a strong 2023, but without the unsustainable and ridiculous gains of years gone by.  Which is absolutely fine by us!

Written by,

Chris Perkins, Broker/Owner
HaliPad Real Estate Inc.
902 210 1223

Posted by Chris Perkins on
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