“We Thought of Selling our House, But Why? Just to Rent? Everything is so [expletive] Expensive!”

*Disclaimer – I have permission from my client to publish this post, so long as privacy is maintained, which it always is.

“We thought of selling our house, but why? Just to rent? Everything is so [expletive] expensive!”

London Ontario Mortgages

I was having a coffee with a long time client of mine a few days ago and we were discussing the London Housing Market and how everything has changed in the past few years. We discussed the possibility of downsizing from her current home and buying another smaller home. We discussed the possibility of a refinance to add some cash flow given housing prices. We discussed the possibility of renting, as the couple is nearing retirement age.

After taking a sip of her coffee she said, “We thought of selling our house, but why? Just to rent? Everything is so [expletive] expensive!”

After almost spitting out my own coffee in laughter, I agreed that London’s housing market has increased quite a bit in the last two years, uncertainty exists for current homeowners (which contributes to the prices of home buyers), and has definitely increased the cost of renting.

While humorous, my client’s comment gets down to the crux of the issues facing current homeowners, prospective first time home buyers, and renters.

Current Home Owners

Current Home Owners in London face a contradictory problem – Although the value of their homes have gone up by an amount far above what we would consider normal (although this could be a new normal), they are stuck in a conundrum:

Yes, they will get a lot more for their house that which they paid , but they also have to pay a lot more if they were to sell to upgrade (or, as demonstrated by the above quote, downgrade).

While it might be enticing for homeowners to sell to upgrade, paying what might be perceived to be an above-normal price to downgrade their living situation is perceived to be, at the very least, off-putting.

Given the apparent uncertainty surrounding the housing market, homeowners, especially established homeowners, continue to sit on their properties.

This leads us to Prospective First Time Home Buyers.

Prospective First Time Home Buyers

It is a national past time that as young people come of age and get settled in their careers they want to own their own home.

Yet the number of First Time Home Buyers, due to the situation mentioned above (and others), far outnumbers the amount of home sellers. When demand outpaces supply, prices go up. So just as First Time Home Buyers are looking to purchase their first home, the current generation of established homeowners are reluctant to sell theirs.

This is a self-reinforcing dynamic.

Enter Renters

Home Renters

Many people have no interest in purchasing a home and are perfectly happy renting. There is nothing wrong with that.

However, as First Time Home Buyers are kept out of the housing market they are being forced to remain renters. As would-be home buyers are being kept in the rental market, rent prices are going up – nearly 15 percent in 2018 alone. This creates a problem for would-be renters who have not interest in, or cannot buy a home, but that is a discussion for another time.

The main takeaway is that as First Time Home Buyers are being kept in the rental market, more and more are trying to enter the housing market, leaving more and more of them in the rental market, thus increasing rental prices.

This is another self-reinforcing dynamic.

Full Circle

As rent prices continue to rise First Time Home Buyers are even more ambitious in their pursuit of owning a home, driving up housing prices, leaving homeowners less likely to downgrade or enter the rental market further driving up rent prices.

This is a locked in cycle, with multiple self-reinforcing dynamics. This is not even to mention a a situation unique to London with the entry of Toronto boomers into London’s market, flush with cash from the sale of their Toronto home.

So now what?

The only way to break a self-reinforcing dynamic the entry of an external force.

Time will tell what the source and form this external force takes. Whether it be a hike in interest rates, a drop in the economy, or further government intervention, what is clear is that this cannot stand.

The free market is supposed to work for everybody – Renters and Home Buyers, Young and Old. As my client aptly demonstrated, it isn’t.