The Salesman: The wave theory
By Dan Floman
If you have been in real estate long enough, you know about the wave theory. No, I’m not referring to a mathematical theory, but the rise and fall of the velocity of sales in the market.
From-time-to-time, and often due to governmental interference, the number of sales in a given quarter rise or fall. The more the volume of sales fall, the greater the news coverage.
The beginning of this year should prove to be a slower sales cycle, not because of pricing, which continues to rise, but because of the government’s desire to slow the pace of sales under the premise of protecting the future. Because of that, the new mortgage rules and stress test are now in place. Some statistics show that 10 per cent of the market will no longer be able to purchase a home. Others have stated that is a lowball estimate. But what is the underlying reason behind the government’s changes to the rules? Is it to actually slow the market or to ensure that buyers are not over-extending themselves and protecting the future? Only time will tell, but the issues surrounding the new stress test are not black and white.
The first issue is that they are requiring conventional buyers to qualify at a much higher interest rate and therefore eliminating many potential homeowners who would otherwise qualify. Keep in mind they are basing this on potential future increases in interest rates, while at the same time not factoring in employment income increases. In other words, they are saying you need to qualify for a much larger monthly payment (assuming the rates go up over the next several years) but not factoring in salary increases.
This makes no sense. This creates undue pressure on young families trying to get into the market. Forget investors for a moment and focus on Canadians trying to get into homeownership.
The other issue is that so much emphasis was put on getting this message out that the fear mongering will take over the psyche of many who do qualify.
This in turn will affect the volume of sales in the short term.
The silver lining in all this is that — like a wave — the slower short-term sales numbers will often be offset by a rush of sales in the second quarter when the reality of the changes are absorbed and understood better. The initial shock to the general public will be forgotten and buyers seeking a home or an investment will come back.
Let’s face a truth: Toronto and the outlying areas are still a great opportunity for long-term investing. As well, the first quarter will see some unique opportunities for those people looking to get into the market. Waiting too long may result in missing out on lower prices; as with any wave, with rising sales volume prices increase, too.
Take your time and purchase wisely … but don’t stop buying.