When will the real estate bubble burst? It won't, says veteran real estate appraiser
Influx of people, short supply and strict rules on new housing driving unprecedented demand
Les Otto believes it's hard to get a straight answer from a real estate agent when it comes to the current state of the London region's supercharged housing market.
After all, for the most part, he said, they're feeding the frenzy.
"In many respects, they are. All they care about and, I have a lot of friends in real estate and many of them I respect, but they get paid on a commission they make on a house sale, so the more it sells, the more they put in their pocket."
Otto knows this because he's been working in the real estate business in southwestern Ontario for the last 40 years as an appraiser. In order to get a loan from a bank to buy a house or refinance a mortgage, the bank needs an objective assessment of how much that house is worth since that same house becomes the bank's collateral for the loan. That's where Otto comes in.
In the four decades, he's been in the business, he and his team have managed to build their firm, Otto & Company Real Estate Appraisals, into the largest business of its kind west of Toronto. His staff assess homes as far afield as Windsor, Guelph, Owen Sound and everywhere in between.
So what does a guy with 40 years of experience assessing the value of homes see in today's unprecedented housing prices? Does he see what some believe is simply a bubble that will inevitably burst?
"I don't see it," he said.
Why the housing bubble won't burst
Otto said the current state of the housing market is seeing unprecedented prices based on unprecedented demand, which has been fuelled by an influx of people looking for homes, tight housing supplies and strict government rules on new residential development.
"A lot of this is being generated by people escaping or moving out of the GTA and its sphere of influence," he said.
"They no longer have to be in Mississauga, or Guelph or Brantford. They can now go to Woodstock, Cambridge; they can come to London, some of them have even gone to Windsor.
"You get the lifestyle, you get larger lots, you get more bang for your buck in housing."
Too many people looking for too few homes
Otto said the exodus from the GTA, combined with large numbers of immigrants coming to Canada a few years ago has meant the supply can't keep up with the demand – in other words, too many people looking for not enough homes.
"The demand drives the prices. I've seen houses now that are exceeding a million dollars that a few years ago they were barely pushing $750,000."
The supply situation is being closely monitored by local realtors. Last month, the London St. Thomas Association of Realtors said based on the current rate of sales, it would take less than two weeks to liquidate the region's current housing inventory.
Otto said it's why we're seeing bidding wars become the norm. Real estate agents know there are a lot of potential buyers with relatively few homes for sale, so they deliberately price homes under market value to get more realtors to bring their clients in and hopefully, trigger a bidding war.
"In a bidding war all bets are off," he said.
Bidding wars offer little transparency
"The realtor comes and says, 'if you really want this house, you better put $25,000 higher than the list price or $50,000, or some other ridiculous number and people feel compelled to follow the realtor's lead."
Not only are potential buyers compelled to offer above asking, Otto said, they're going in blind.
"There's no transparency about what the other realtors are bringing to the table. People are being, I wouldn't say coerced, but it's been suggested to them that they bid high if they dearly want this house."
"There's not a lot of negotiation between buyers and sellers and there can't afford to be. There are too few homes for sale."
Realtors aren't the only people raking in big profits from real estate, Otto said.
"It's huge money for governments."
Federal and provincial governments not only charged HST and the sale of a home, they also tax the real estate agent's commission, while city hall collects money on land transfer taxes whenever a home changes hands. It also collects money on development fees.
It's huge money for governments.- Les Otto, veteran real estate appraiser
One of the reasons there are so few homes in Ontario right now, Otto said, is because strict provincial and municipal environmental laws are making it more difficult for developers to get shovels in the ground.
"You have municipalities making it ever more difficult to get land shovel ready from the day that a developer maybe goes out to buy 100 acres, it takes two or three years of planning and engineering to get it on the market."
All that work by the developer, to navigate city hall, order archeological surveys and environmental assessments all factors in to the price of a home, not to mention the high price the developer paid for the land to begin with.
Otto predicts that as the pandemic runs its course, there could be a softening of the market this winter when fewer people are looking to buy. But he said as long as interest rates and housing inventories remain low, a sudden housing crash is off the table.
"I don't see it," he said. "The only thing I see is maybe a periodic softening as it gathers its breath to go on again."