Extraordinary demand coupled with low listings are making County real estate unsustainable. With September sales at 225% of last year and inventory at 1/8th of normal levels, resale homes in the County are becoming harder to find than toilet paper last March.
Uprecedented Demand
Fueled by a combination of cheap mortgages, a booming Toronto market, the growth of working from home and a desire to flee Toronto as Covid-19 returns, existing homes sale in September reached 225% of a year ago.
Shrinking Supply
In a normal year, the number of homes on the market increases during the fall as summer sales tail off. However, this September active listings for existing homes fell to 40% of the number of listings of a year ago.
In fact, the situation for people looking for a year-round residence is even worse than that. Of the 134 listings for existing homes on the market at the end of September, 20 of them were for 3-season cottages that cannot be occupied during the winter.
All-Time Low Inventory
Most years there is a 6-8 month inventory of existing homes for sale in September. With this year’s extraordinary high sales and limtied listings, the inventory in September was just over 1 month even with seasonal dwellings included, another reason why County real estate is unsustainable.
Homes Selling Quickly
In today’s extreme sellers’ market you’d expect homes to sell much more quickly than normal but that doesn’t appear to be the case when judged by a common metric called average days on market (DOM). The average DOM for September was about the same as last year.
However, the average DOM glosses over something fundamental: good homes are selling extremely fast while dogs that have been on the market for a long time continue to languish.
Instead of the average days on market, it’s much more useful to look at the percentage of homes selling within 7 days after they are listed.
Traditionally around 5 % of existing homes sell in 7 days or less after they’ve been listed. This year was not that different…until Semptember. With the extreme demand and limited supply in September, close to 30% of homes sold within seven days of listing.
More Buyers Paying Asking Price or More
For the past four summers, roughly 20% of existing homes sold in the County have sold at or above listing price. During this summer’s sellers’ market, the percent rose to 81% during August, followed 48% at or above listing price in September. The September decline reflected sellers increasing awareness of the hot market, leading them to increasing typical listing prices.
Prices Continue to Climb
The average selling price for exiting homes continued to increase during the summer, with the average house price for this July-September up 24% from the summer of 2019.
Implications
There’s a simple reason that makes County real estate unsustainable: Covid-19 means many people from Toronto want to move here, but people who live here don’t want to leave. As a result, listings don’t keep up with demand even as prices increase.
Under these conditions, buyers will have to move quickly and be prepared to offer listing price or better.
On the other hand, although the market is extremely hot right now, there is no guarantee that this will continue.
Over the long run, the demand for County real estate is likely to be strong, especially with working from home as a permanent part of the landscape for knowledge workers.
On the other hand, the market is highly unpredictable in the short run, and a decline in prices can’t be ruled out depending on the course of the current recession and Covid-19. This is not the time to over-extend.
A note on methodology: This report specifically concerns existing home sales and excludes new construction. The market behaviour is different for each of these types of homes and combining them together clouds what’s happening in the market. First, many buyers coming to the County are not looking for a new home in a sub-division. Including listings in sub-divisions makes it appear that the selection is better than it really is. Second, most listings for new construction represent the promise of a home to be built sometime in the future, and not a home that can close in the near term. Finally, buyers of new homes pay the full asking price with no negotiation over the base price, while re-sale homes can sell below or above listing price – combining existing homes and new homes together masks price trends for existing home sales. New homes represent an important and growing part of home sales in the County but need to be analyzed separately to avoid misleading conclusions.
Thanks for sharing the data. A similar pattern took place as New York City resident look upstate in New York for residences. What is unclear is how many of these buys are for uses other than BnB short term rentals. I would guess few but I can be wrong. The down side to this mini-boom is, of course, that it is harder and harder for county workers with families to afford a county home. That is the more hidden face of the current housing crisis, people unable to live within reasonable distance of where they work.
Although the Short-Term Accommodation rules approved in 2018 will not roll-back existing whole-home rentals of the type you describe, licensing will serve to curtail the conversion of homes into absentee owned investment properties. More recently, Council suspended STA licensing altogether as of September 30th. Licensing will resume after Council reviews and changes the licensing rules in January. Given the political pressure on Council, I believe we’ll see a further tightening on licensing new whole-home STA’s, if not an outright prohibition on licensing of new whole-home STA’s.
Depending on what the future holds in terms of Covid-19 and economic recovery, it’s possible that we will see investors start to flee STA’s. During the lock-down this spring, STA’s were not allowed to operate, with the result that many STA investors had ongoing mortgage and other payments with no income. A future lock-down could result in significant sales of STA’s under duress. Likewise, if the real economy enters an ongoing recession, demand for a relative luxury like a weekend in the County will fall. No one knows for certain what will happen with either Covid-19 or the economy. My main point is that fhe investment risk of buying a home for short-term rental is far higher than many such buyers realize. Investment is an STA has liquidity risk (can’t instantly sell it) and diversification risk (all one’s eggs in one basket). That is why I encourage people who want to buy a County property purely as an investment to consider a more liquid and diversified real estate investment such as a REIT (Real Estate Investment Trust).
Given that you’re an economist, I recognize that all this is “teaching a grandmother to such eggs.”
Great report.
I am curious on the influx of new home building will effect real estate prices.
I expect that growing number of new homes in sub-divisions will tend to dampen the rate of increase of prices, rather than actually causing them to decline. For many people who are looking to buy in the County, privacy, elbow room and character are important. Thus, for a lot of home buyers, a new home in a sub-division is not an acceptable substitute if they can’t find what they want in the re-sale market. New sub-division homes are not a direct replacement for existing homes.
Thanks for this. Two questions:
1. Of all home sales in the County, what percentage are re-sales and what percentage are sales of new homes? Also, do new homes constructed for the owner by a private contractor on previously vacant land constitute a significant part of the market?
2. Do you have any data or an estimate of the comparison of prices of home sold 5 years ago and resold in the last year? We are not interested in selling but it would be nice to know what the current value of our property might be.
Thanks again. I will be signing up for your webinar on the Official Plan. It is an important document that most people know nothing about.
Don Payne
1. New homes form a quickly growing proportion of County home sales. Five years ago, new home sales were 1% or less of all sales in the County. By this time last year, new home sales had increased to 15% of total sales and are running at the same level this year. The trend in term of listings is even more pronounced. These numbers do not include custom-build new homes that don’t appear on MLS and so underestimate the percentage of new homes by 3-5% by my estimate.
2. From 2015 to 2020, the average price on existing homes sold in Prince Edward County increased 83% or 13% per year (compounded). Some caveats are needed. The increase in the average price includes appreciation of homes, but it also includes any change in the product mix. To understand the impact of product mix, support house prices are unchanged from this year to next year, but this year most of the homes sold are in the less expensive category and next year most of the homes sold are in the executive (more expensive) category – the average price from this year to next year would increase because of product mix change, but the real appreciation in house prices would be nil. Also, any increase in the average house price fails to take into account any investments made by homeowners. The calculated increase in the average price over-estimates the actual real increase in property values, but in a small market like ours, it’s all we’ve got. (In big centres it’s possible to use the sale-resale method such as the Teranet-National Bank index which is far more accurate.)