This week in real estate – a prediction for 2012

This week in real estate, the prevailing prediction for Canadian real estate in 2012 is the same as 2011, except this year what they predicted for 2011 it might actually happen only a year later. Yes, it’s that time of year again when pundits predict what they think lies ahead. Naturally they disagree with each other.

Mortgage rates, the economic uncertainty in Europe, a looming economic slowdown in Canada, tepid wage growth, unaffordable home prices and record consumer debt levels are all predicted to put downward pressure on the real estate market.

However, downsizing baby boomers, new household creation driven by a maturing Generation Y and a steady stream of immigrants are also likely to stimulate healthy demand.

How the real estate market will might play out over the year according to some experts is that in the first half of the year, we will see a 5% drop in prices and then in the second half of 2012 we will see a 5% rise – basically prices will average out to be stable for 2012.

Sounds possible.

The best thing to do is keep your eyes on the condo market. It typically rises and falls ahead of the housing market and to larger degrees. Many people believe that condos are currently overpriced. Furthermore, there are currently too many units coming onto the market next year, creating downward pressure on condo prices. I have to agree. In some markets, condo prices are expected to fall by 15%.

What we have in Canadian real estate is a bit of a bubble, but nothing like the housing bubble that hit the American market a few years ago. Experts say we’re in for a soft landing.

The CIBC says that the stellar performance of the Canadian Housing market in 2011 is a bit of a puzzler, when conventional wisdom and economic factors suggest that it should be taking a greater hit than it has. “The average price of a house has risen by 28% since reaching its recent cyclical low in January 2009, and it is now close to 50% above the level seen before the recession.” Home prices for the first 10 months of 2011 rose 7.8% year-over-year, according to the Canadian Real Estate Association.

The CIBC reminds Canadians that they housing market is made up of separate pieces, each with unique challenges and conditions. Here in Waterloo Region, our local economy is humming along nicely, seemingly immune to any economic factors in the nation or the world. We are expected to add 230,000 new residents in the next 20 years.

Where are we now and what does all of this mean?

Prices are already softening. Housing starts are medium. MLS activity is starting to slow. This suggests the market is already starting to level off.

How will a more relaxed real estate market affect new homebuyers, investors and renovators in 2012?

1. First-time home buyers

  1. Affordability and interest rates will be the major concerns in 2012. Prices will continue to be expensive, especially in urban centres like Vancouver and Toronto, since interest rates are likely to remain low for the time being.
  2. But rates won’t stay low forever, which is why you should estimate mortgage payments based on interest rates that are 2 or 3 percentage points higher than current interest rates, and if you cannot afford that, get a smaller mortgage and buy a less expensive house.
  3. Expect an end to bidding wars, or at least a temporary ceasefire. New home buyers will have the luxury of time in terms of looking at properties without being rushed into decisions. That’s the positive. The negative is that prices continue to be drastically higher than they were five or 10 years ago.

 

2. Investors and flippers

  1. If you’re in it to flip it – meaning you buy a home hoping the price will rise by just doing minimal changes – those days are over.
  2. In some pockets of the country, you may even see prices go down.

 

3. Renovators

  1. The cost of renovations will not increase significantly so long as interest rates remain at their current level, so it’s a good idea to take advantage of this time to finance these projects.
  2. For those looking to take on a second mortgage, remember to make sure you’re equipped to finance them if interest rates creep up.
  3. Variable-rate mortgages are still a good option for those who are able to withstand fluctuations in the market and “ride the ups and downs without getting a stomach ache.”

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