The smug

Most Canadians don’t live in a metropolis. For them, things have been weird for over a year. Folks in smaller cities, towns and the hinterland aren’t used to bidding wars, rockstar realtors rolling in Audis or houses selling for more than vendors actually want. Along with neck tats, scooters and vexing over pronouns, those were things best left in the Big Smoke.

But no more. Houses in places like Kelowna and Kitchener have erupted in value, with gains eclipsing those in Vancouver or Toronto. And now, more changes.

As in the cities, the number of homes listed for sale has crashed. In K-W, for example, the 590 properties that appeared in August barely topped sales and represented a 27% drop from last year and 13% decline month/month. Says realtor Troy Schmidt: “The number of homes coming to market continues to be overwhelmed by the number of homebuyers we have. The average number of days to sell in August was 12, compared to 17 in August 2020, and a previous five-year average of 26 days.”

Fewer listings mean lower sales. In this town transactions dropped 22% last month. A listings drought also means a squeeze on values. Kitchener-Waterloo saw average detached prices jump 22% year/year in August to just a few hairs shy of $900,000. Astonishing. In 2018 the average was $575,000. A 57% inflate in 32 months.

We know why the price hike happened. Crazy-cheap interest rates thanks to the pandemic emergency. Urban flight as people rushed from big city condos to the burbs and beyond. WFH allowing migration from close to the workplace. Aggressive nesting as the virus freaked people out and narrowed their worlds.

But why so few sellers now, when prices yield an absolute windfall?

First, real estate is a disease. Way more infectious than Delta. Everybody’s got it. No vax available. People without houses want nothing more in the world than to swallow choking heaps of debt and get a property. People who own some are smug, thinking they’re geniuses and this asset will go up forever. Therefore when the market softens (as it has been doing amid falling sales) they’d rather withdraw the listing than contemplate lowering their asking price.

Second, moving’s a nightmare. Sellers usually become buyers (although some smarties cash out and rent) and it ain’t easy. Few listings to choose from and too-high prices. Once you heap on land transfer taxes and closing costs, most vendors cannot afford to purchase a property equal to the one they sold without financial slippage. So they don’t. They stay put and reno.

Third, fear. A survey this week found almost 80% of Canadians think the virus is coming back in a major way and the 4th wave will be the worst one yet. Once again owners recoil at the thought of icky, germy prospects wandering through their homes, shedding on their stuff. The pandemic has fried a lot of brains over the past 18 months, and until Delta truly fades and all restrictions are over, listings will remain thin.

Finally, if you ever need proof emotion trumps logic and the pants are mightier than the head, here ya go. In K-W a person could pocket a 57% gain on an asset held for less than three years, completely free of tax (more if leverage were involved), while it also provided accommodation. This does not happen often in a lifetime. Like, usually, never. By harvesting this taxless windfall and investing it prudently, it’s possible to generate enough income to pay all living expenses and still grow a fat egg for the years ahead.

Instead, most people make rookie mistakes. Their recency bias leads them to believe this asset will rise forever. They gamble that unearned house gains will never be taxed. Their inexperience and financial illiteracy make then fear financial markets. They fail to understand how real estate can turn illiquid. And they live daily with the risk of no diversification – not understanding what even a few interest rate hikes might do to their treasure.

Naturally, when demand is high and supply low it’s a great time to sell. Especially if you’re trying to get rid of a tarted-up slanty semi, a knob-&-tube beauty, a place beside meth-head neighbours or anything with bugs. The kids will snorfle up anything today.

On the buy side, it’s obviously better to wait if you’re shopping in a market with short DOMs and escalating values. Things will change. They always do. You will learn this.

About the picture: “Hunter is an 11 year old Cavalier King Charles Spaniel,” writes Al. “He’s posing with his favorite stuffy. He had a hard day riding (sleeping) in the truck with his ‘dad’ and is getting a well deserved rest. He’s as intolerant of deer as my spouse and as risk averse as I am. That’s why we’ve followed your formula for years and are glad we have. Thank you for your blog. Huge benefit for the money!” Have a pooch to share with the pack? Send it to me at [email protected].