REAL Trending Episode 43
What We Can Learn from The Canadian Housing Market
Also: How Affordability and Inventory Intersect, and Choosing a Business Model
From REAL Trends, the trusted source for real estate industry news, this is REAL Trending, episode 43. Today, we’re going to discuss the Canadian housing market, the affordability and inventory crisis, and lastly, the path to prosperity.
Canadian Housing Market
Just having returned from the Canadian Real Estate Association’s annual spring meetings and gathering of their membership in Ottawa, I learned a great deal about their housing market. What’s going on in Canada? The market is generally healthy, and rates are low, relatively speaking, just as they are in the U.S.
Canadian brokers report though they’re facing a couple of challenges. Obviously, inventory is a problem for them as it is in the US, particularly in major markets like Toronto, Montreal, and Vancouver; however, there are other issues with the market that give us a foretelling of what could happen in the U.S.
Firstly, to cool off the housing market, provincial government officials in British Columbia and Ontario added surcharges for nonresident, non-occupant investors, particularly in the condominium market, a significant surcharge in an attempt to slow the market down. Now, this is not recent in both markets. This has gone on for some years, but it has had a cooling effect in the upper end and particularly purchases by foreign individuals.
But secondly, too, again, cool off the housing market to some extent, they added a second measure, which brokers refer to as the stress test. Essentially, if an individual goes in to qualify for a mortgage and today’s rate is 4% for the benchmark mortgage rate, the buyer actually has to qualify as if that rate were two points higher, all these things in an attempt to cool off an overheated housing market.
Now, some of the challenges facing parts of Canada include the Alberta marketplace, Calgary and Edmonton area, which have been hit significantly by the decline in oil prices from nearly $100 a barrel some years ago, four to five years ago, to today’s $60 a barrel, on top of which the Canadian oil in the Alberta province is not easy to transport. There are not an abundance of pipelines, and regulatory barriers exist to block some of those pipelines, so they’re having to use train cars mainly to get the oil to the marketplace. It’s had a very chilling effect on the housing market in those key markets in the western part of the country.
Incredibly enough, most Canadian real estate professionals we talk to, brokers and agents alike, are very bullish on their general economy and the general housing outlook in Canada, but it is interesting to note that the chilling effect of both the surcharge for nonresident, non-occupants, and the stress test have cooled off what was a very buoyant housing market. We see some of those same things starting to happen in the U.S. with the increase in transfer taxes and/or millionaire property taxes where people are starting to extract money from those who purchase or sell expensive homes to fund government purposes.
We also have numerous obstacles to building homes in some of those markets and rent control, which has now taken place to some extent, not only in New York City but in parts of Chicago, Los Angeles, and in Oregon of all places. Bottom line is the Canadian economy is strong for the most part. Also, the Canadian housing market remains buoyant.
Affordability & Inventory Intersect
Secondly, let’s talk about affordability and inventory. In a book called The Housing Boom and Bust, written by former Stanford and Hoover Institute economist Thomas Sowell some years ago, he compared and contrasted the housing markets of Los Angeles and San Francisco with those of Dallas and Houston beginning in the late ’60s when the economic factors of all four markets were roughly similar in terms of household incomes versus housing prices.
Now, of course, Houston and Dallas are two of the most affordable markets in the U.S., and Los Angeles and San Francisco are two of the most unaffordable markets. It’s interesting to note that the general economic conditions of both states are buoyant. They both suffered during the same downturns. They both boomed during the same upturns, although, of course, their economies are somewhat different.
Sowell points out that almost all the disparity in how these four markets have diverged over the last 40-50 years are due to government policy, particularly at the local and state level. On the one hand, in Texas, development and the building of homes is widely seen as a very positive thing for the economies and for the families that live and work in the Dallas and Houston and other Texas markets as well.
California, rather, took a path to restrict land development to protect large swaths of developmental property and keep them out of the hands of development and have raised the cost and complexity of building housing, particularly for entry-level families significantly since 1970 and continue to do so to this day.
We have a national problem of affordability in most markets. We have inventory problems. What’s to be done is for national, state, and local Realtor associations, mortgage banking companies, title insurers, developers, and community officials to understand that limiting development is no answer when the population is growing and the economy’s strong. We’re adding 1.3-1.5 million net new households a year in the United States, have been doing that for some years now, while we’re only building 1.1-1.2 million housing units. There’s accumulated deficit in the millions of housing units that are needed.
For all the people reading/listening to this, you may start by encouraging your local and state Realtors and/or the mortgage banking organizations you get in touch with because sooner or later, it’s going to get worse and worse, absent some other policy or change in direction at the local and state level.
Choosing A Business Model
Lastly, a comment on the path to prosperity. We have heard this past seven weeks in attending virtually every national real estate company’s conventions from New Orleans to Las Vegas and everywhere in between, we’ve heard over and over and over this puzzle of what’s to be done in the brokerage business with all the new, some people call them disruptors. They’re just new competitors, and we’ve always had them in the industry going back as long as anyone can remember. We keep hearing that brokers have to improve their technology or improve their marketing or improve the customer experience.
We have a different point of view on this. Last summer, we underwrote ‘Relationships Still Matter Most With Housing Consumers, with California Association of Realtors and The CE Shop . We’ve been doing this roughly every four to five years since 2001. The interesting part is, is that the usage of agents in the purchase sale of homes has never been higher than it was in the summer and spring of 2018. Ninety percent of all recent buyers and sellers used an agent to buy a home. Ninety-two percent of millennials used an agent to buy or sell a home. Satisfaction was at a 17-year high.
It’s clear that consumers think using an agent is a good idea. It’s also clear that they believe that the services agents offer, including negotiating the price in terms of a sale or a purchase or helping them find the right homes either for comparable sale purposes or to purchase that consumers are extremely satisfied with the services of agents; however, it is important to note that consumers find the process complicated, time-consuming, and risky for some reason for the rise of the iBuyer companies who seek to circumvent the problem of the normal sale and purchase cycle in a home. But let’s not get confused–the problem does not reside with the agent and the service they provide consumers.
That leads us back to the path to prosperity. Clearly, what brokers, if they wish to be successful, have to pick a business model that fits them personally and their corporate objectives and what’s going on in their marketplace, but every brokerage, it doesn’t matter what model it is whatsoever, must find a way to more effectively recruit and develop agents and their skills and bring them to their companies and develop their selling and listing and customer and client skills. That’s where the focus and must be, and that’s where the path to prosperity resides. The evidence is overwhelming that brokers at this particular juncture don’t need to get distracted from that core attribute. What we’re faced with right now in the brokerage industry is a challenge of the economic models we have, but not the model of recruiting and developing great agents to offer great services to recent buyers and sellers.
BONUS: Information on Gathering of Eagles
The Gathering of Eagles will be May 15-17 in Denver, Colorado at the Grand Hyatt Hotel. We’ll be hearing from such luminaries to the industry such as Robert Reffkin, CEO of Compass, the heads of four large iBuyer companies and a discussion from myself and some special guests of how brokers can deal with all the change taking place in our industry.
You’ll also hear from two of the finest leadership coaches and trainers, Larry Kendall of Ninja Leadership and Mike Staver of Staver Group helping people understand how do you deal with all of the change, all of the threats, in these trying times.
If you want to know how these new companies are operating and how they relate to brokerage companies, then we’ll see you at the Gathering of Eagles this May.