In the 20+ years I’ve been in the marketing and sales of new homes, the most common question I’ve been asked is “is now a good time to buy?”.
As difficult as it is for some to admit these days, a home is — and always will be — an investment; and for the average person, whether they live in the home or not, it’s the largest investment they will ever make.
So, this question is important, because no one wants to make a bad investment decision.
But truthfully, timing that investment is very tricky to do, as markets can move quickly… like, overnight. One day your home is worth one number, and tomorrow it can be worth much more or much less, and there is little you can do to control that. Hindsight is often “the greatest advice you didn’t have” in real estate.
My career has been spent in the new home business, so I won’t try to speculate on the resale market, but I can tell you from experience, and from looking at the contract data flowing through our system, there are a number of reasons why now may be a good time to buy a presale.
Disclaimer: this is not investment advice. You’ll ultimately have to decide for yourself, but here are five reasons why now might be an excellent time to buy a presale.
#1: Prices are as low as they are likely to get, on a unit basis
I chose my words carefully for this one, so let’s dissect it. Generally speaking, the closer you are to your market’s city centre, the greater the price declines from the peak. Be it Vancouver or Toronto, prices in both markets are down, and in some cases, they’re down by a lot.
As you move further from the core, you may find prices rise before they decline again — particularly as you move to more rural or recreational areas that saw some abnormal COVID inflation.
As for the question of whether prices can go lower, the answer is maybe — but unlikely by much more than they already have, due to a few factors. First, rates are down a full point, and are still trending downwards, reducing the cost of a purchase. This means price doesn’t have to pick up any further declines. Beyond that, new-home supply has been choked, so inventory is limited to what there is… which, in many cases, isn’t much. And, the market has shown it won’t — or it can’t — launch new projects again until prices come up. Some very oversupplied markets may still have further to fall, but very few have that problem.
#2: Average prices continue to rise
As differentiated from reason #1, where I clarified “on a unit basis,” when you look at market averages, the price people are paying for a home generally is going up — by our data, the average price of a home through our system has risen 7% since the peak. This aligns with unit prices, whereby the bottom of the market has come up with additional cost pressures, the middle has come down a bit to meet affordability, and the top has pretty much just stopped selling until the market returns.
In real numbers, in 2021 we saw prices between $650 and $2,500psf, vs. today, where sales are much tighter — in the $800 to $1,250psf range.
This means that moving forward, people are prepared to — and can expect to — pay the same amount or higher for a home, and as rates come down, they will be able to buy more home (AKA: higher price) than what they could afford previously. This allows the middle to ease off or stop declining, and the top of the market to start up again.
#3: Supply is as low as it has been, and will stay that way ‘til spring — at least
As mentioned earlier (and as I’ve been saying for the last two years), developers have an incredible ability to control supply by simply not launching if the numbers don’t work. And that’s exactly what they have done. In Q2 we saw a bunch of supply come on with weak absorptions, and developers immediately responded — launches dropped 180% quarter over quarter. This fall we had 33 projects slated to launch in the first six weeks, and only nine actually went. Over the last two-and-a-half years we’ve seen over 90 projects (20,000+ units) move from launch stage to “delayed” or “on hold.”
Interest rates have really started to come down, which will start to move the market, but the reality is that the fall market has largely been missed. This means that most developers are not planning to launch their projects until the spring market hits — in six months’ time. From now to then, the growing demand will eat up the current inventory, and once absorbed, the new launches will proceed at new prices.
READ: Insider: When It Comes To New Housing, Will Governments Ever Listen To The Experts?
#4: Interest rates are expected to drop even more
Piggy-backing on the last point, interest rates are expected to drop at each of the next four announcements leading to spring. Even if they only drop 25bps per date, that will add an additional 1% decline in rates before the spring market. And with each drop, demand will grow. On top of the 125bps we have already seen to date, rates will be down at least 2.25% by the time the spring market is going, which, according to most experts, will be more than enough to heat up demand.
In presales, the current rate only matters as it relates to market confidence, as you don’t close for years to come anyhow. Therefore, there is no reason to wait for rates to fully drop, as long as you are confident in where they will be at closing.
And with six months of demand and confidence building without anything launching, what do you think is going to happen to prices in the spring market?
#5: Developer promotions are as good as they’ll get
Look around, and you’ll see evidence of a bottom everywhere. This includes developer incentives at a high. From mortgage buy-down incentives, to cash back, to reduced deposits, now is an incredible time to get a deal.
In fact, looking at contracts that flow through our system during a good market, there are almost no discounts, and deposits are 20-30% across the board. Today, we are seeing discounts and incentives — sometimes in the tens of thousands — with deposits more commonly in the 10-15% range. Once the current inventory is gone, these incentives will be gone too.
Of particular interest should be recently launched projects. It’s one thing to get a deal on a presale that is expected to complete shortly, and another to get one from a recent launch with the same incentives, for which you have a full 3-5 years before closing.
To summarize, supply that exists is eager to move, and we’re seeing sharp prices, discounts, promotions, and reduced deposits to help make it happen. Buyer purchasing power is improving, and will only improve more as rates fall further over the coming months (and as that buyer gets comfortable with a new normal on price, which is higher than it was before). With more purchasing power, demand and confidence in the longer term value of a presale will rise. With a market that matches eager supply with more capable demand, this would signal the bottom may be here, and the optimal buying opportunity could be now — or most certainly close.
It’s been two-and-a-half years since the market turned, on the heels of higher interest rates and faulty government intervention, intended to create affordability (which it did not). This spring, we will hit the three-year mark, and interest rates will be back to normal levels, providing much-needed relief to a very restrictive market.
Savvy buyers watch the signs and won’t wait for the benefits of hindsight to hit once the opportunity has passed. There is a lot of strong evidence to support a robust buying opportunity is at our doorstep. The only way to understand the opportunities in your market is to start shopping. You may just find that deal you’ve been waiting for.
This article is authored by Ben Smith, President of AVESDO: a Canadian software company harnessing the power of data to help real estate professionals make better, faster, and more informed sales decisions.
______________________________________________________________________________________________________________________________
This article was produced in partnership with STOREYS Custom Studio.
