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The first quarter of 2018 is now in the books. It’s probably a good time to take a look at some of the sales data just in and see if we can see any sort of trends emerging.

Before we do that, however, let’s look back at a few events that occurred in 2017 that would have directly impacted the market and will continue to effect the market in the days and months ahead.

For some time, up to and including 2015 the market in the Niagara Region had been relatively stable. Prices hadn’t increased much, nor had the overall sales activity. That began to change early 2016. Fueled by record low interest rates, affordable housing and an influx of foreign buyers, prices in Niagara as well as the overall number of sales began to increase. And this accelerating trend continued into 2017. Leading the way was St. Catharines where prices between January 2016 and April 2017 rose by over 65%, with other municipalities in Niagara not far behind.

In an attempt to reign in rising prices and cool the market in the Golden Horseshoe, the Provincial government in April 2017 introduced a 15% foreign buyers Speculation Tax. This had an immediate dampening effect on the market as a significant portion of foreign buyers were taken out of play and investors and speculators alike took a more cautious approach to buying.

After years of record low interest rates the Bank of Canada decided the economy was strong enough to withstand an increase in interest rates. This no doubt was spurred in part by low unemployment figures, a slight strengthening of the economy and the fact that U.S. rates were on the rise. Over the course of 2017 the Bank of Canada raised prime three times moving it from a record low .25% to the 1% level where it sits currently. This impacted the cost of virtually all borrowing.

With interest rates so low, cheap money was available enabling people to do a lot of things they couldn’t afford to do before: buy their dream home, renovate, buy a vacation home, take a trip and so on. And people did just that. As personal debt rose and rose, the Feds became concerned, and to a certain extent rightly so. With interest rates now on the rise, would people be able to renew their mortgages in five years when rates were presumably higher, and at the same time service their growing mountain of debt? As a pre-emptive measure, the government introduced a ‘stress test’ for all high ratio loans, requiring the borrower to not only qualify for his mortgage at the current rate but also to qualify for a mortgage at an inflated rate, either the banks benchmark rate (as opposed to the discounted rate being offered) or 2% above their loan rate, whichever was greater.

As of the end of 2017, the government has extended the ‘stress test’ requirements beyond insured mortgages to include all mortgages. So effective January 1, 2018 borrowers, including home buyers or anyone re-financing an existing mortgage have had to qualify for their mortgage at a much higher rate than they are going to be actually paying. Between interest rate hikes and the mandatory ‘stress test’, a mortgagor would have to qualify as of 2018 for twice the rate he would have just one year earlier. This greatly reduced the maximum size of mortgage an applicant could qualify for, and therefore reduced the price point of housing he would be able to buy. Keeping all these factors in mind, let’s take a look at some of the sales data going into 2018. As we did last month, we’re going to look at two key stats, total monthly sales actively and monthly average residential sales price across the region.

Let’s begin with unit sales.

HOLIKO, JIM: 04-2018-MarketWatch-number-of-sales.jpg

Looking at the number of sales recorded for each municipality within Niagara and comparing the first quarter of 2018 with the first quarter on 2017 we see sales activity down considerably pretty well across the board. And while, as we would expect, sales will pick up at certain periods, like the spring market, they continue to be considerably lower than the corresponding month of the previous year.

To further illustrate this trend, let’s look at the regional unit sales, month by month over the past 3 or 4 years.

You will notice that beginning in 2015, each year saw an increase in sales volume month over month from the previous year. But that changed abruptly in April 2017 when the foreign buyers spec tax was introduced. From that point forward, 2017 unit sales figures fell consistently below those of 2015 or 2016. Notice too that 2018 has continued this trend, starting slightly below 2015 volumes and experiencing a slower than usual spring spike.

But what about prices? Let’s take a look at average prices throughout the Niagara Region, municipality by municipality for those same two periods, first quarter 2017 and first quarter 2018. Of course, price comparisons are more reliable in the larger municipalities and over the region as a whole than they are in small jurisdictions where one or two very large sales can greatly skew the average for any given month. The regional summary does provide a pretty good overall sense of what is happening.

HOLIKO, JIM: 04-2018-MarketWatch-residential-sale-price-niagara-region.png

Here we see an interesting phenomenon.

While prices are lower than they were at the peak of the market in April 2017, they are certainly above the levels of a year ago, and they are continuing to show modest month over month gains.

Have a look at the accompanying graph, where we have again examined the market, month by month, across the region over the past 3 or 4 years.

HOLIKO, JIM: 04-2018-MarketWatch-residential-sale-price-niagara-region.png

Notice how 2015 was relatively flat price wise, in contrast to 2016 which saw pretty solid gains, especially the latter half (although it did fall off somewhat at the end of the year). 2017 showed amazing growth to April where it peaked, then the market dropped through to July. It has, however, held steady and even gained strength since then.

And 2018 has picked up where 2017 left off, maintaining substantial gains over January 2017 and while not as high as the peak in April, is I believe positioned to gain significant ground again this year.

When you consider all the adverse changes that the real estate market faced in 2017, the fact that prices have stayed as strong as they have is truly remarkable. It’s a tribute to how solid the real estate economy is in Niagara and to the fact that the prices never rose to inflationary levels. If anything, homes in Niagara remain undervalued when viewed in the context of the entire Golden Horseshoe. And that’s something that we’ll take a good analytical look at next month.