Last month, the average sale price of detached homes in Kitchener-Waterloo hit $963,646.
That’s not a typo.
There was a time not too long ago when $1 million was the benchmark price for a luxury home; at some point in the not-so-distant future, it’ll likely be the average.
The questions on the minds of many: When will prices peak? Can this be sustained?
To predict the future, it often helps to look at the past. Here’s how we got to this point, and what to expect moving forward.
How We Got Here
The prices we see today are the product of market conditions that have remained relatively unchanged for years:
Demand Outpacing Supply
Demand for homes in Kitchener-Waterloo — and across Southern Ontario, for that matter — has far outpaced supply for years. You need only take one intro economics course to understand the impact this dynamic has on prices.
The government has tried to temper demand through graduated stress tests. As we’ve discussed, these efforts have been more or less unsuccessful.
Demand for homes remains high. Until enough homes are built to keep up with this demand, prices should continue to rise.
In January 2017, we wrote about the impact of relative affordability on the Kitchener-Waterloo market.
Long story short: Kitchener, Waterloo, Cambridge, Guelph: all of these cities are far less expensive than those just 30 minutes to our east. We predicted that this would push more and more GTA buyers to our region and that, as a result, our market would continue to “boom.”
That’s exactly what happened.
And, when you look at our five-year analysis of the Southern Ontario market, you can see that prices in all Southern Ontario markets have increased in unison. What this means: the price gap between Kitchener-Waterloo and the more expensive markets to our east has, more or less, remained unchanged.
Waterloo-Wellington is still, even at almost $1 million for a detached home, a relative bargain.
GTA buyers have been making their way to Kitchener-Waterloo for years. In 2016, we talked about this phenomenon and the expected continued impact on local prices.
What we couldn’t predict was COVID and the rapid adoption and acceptance of remote work. This threw the migration to Kitchener-Waterloo and smaller Ontario towns into hyperdrive.
And, because of the continuation of COVID, remote working is now baked into the corporate cake. Work mobility will continue to allow buyers to move toward more affordable options. The migration to smaller towns is far from over.
Low Interest Rates
While buyers need to qualify at a higher benchmark rate, interest rates themselves are incredibly low.
Low rates enable buyers to get the most out of their monthly mortgage payments in terms of mortgage paydown and, ultimately, equity growth. Banking on continued price growth, buyers have continued to jump into the market and lock in their low rates.
Rates will eventually rise. Until they do significantly, however, purchasing power — and, therefore, demand — should remain relatively unaffected.
So, Will Prices Peak?
A peak implies that prices will eventually drop. We don’t see this happening; the market factors that got us to this point still exist and, right now, the existing demand continues to drive prices higher.
And it’s not just a local phenomenon. In the US, Goldman Sachs is predicting that prices will grow another 16% in 2022 for many of the same reasons we’ve discussed above.
The pace of price growth, however, will likely slow once demand drops (most likely due to affordability) or supply rises.
What, as a Buyer or Investor, Can You Do?
Rising prices have obviously made it more difficult to enter the market or grow your portfolio. Here are a few options for those looking to take action in 2021.
Think Long-Term and Buy Small
In 2016, we discussed the need for Waterloo Region buyers to adopt the “Toronto Mindset”: buying smaller products like condos today to gain equity, keep up with the market, and give yourself multiple paths to achieving your long-term goals. For many, that same mindset is useful today.
Invest Without Buying
Recently, we discussed a few ways to profit from real estate without taking on a mortgage or sinking tens of thousands of dollars into a down payment. Click here to learn about some of the alternatives available to you.
At Rego Realty, our goal is to provide you with multiple paths to real estate victory! Contact us below to learn more about our exclusive traditional and “outside the box” real estate investment opportunities.