Skyrocketing Real Estate: Why Prices Keep Going Up?

Skyrocketing Real Estate: Why Prices Keep Going Up?

You have no doubt noticed that the real estate market has been heating up over the past few months and that homes are selling quickly and at particularly high prices. In fact, the average price has increased by 20% over the past two years. Why is this happening? Here are some explanations that may shed light on the dynamics at play.

Some Facts

At this time, the stock of homes available for sale is low, which as led to a marked imbalance between supply and demand, that is to say a small number of sellers for a large pool of buyers. In fact, according to the QPAREB, private home sales are up 14% to what they were last year at the same period. The Canadian Real Estate Association (CREA) has also reported that transactions had reached historic levels in 2020.

Two Factors Behind the Demand and Supply Gap

You paid $305,000 for a house in the winter of 2020. Last month, your neighbour sold his home, identical to yours, for almost $400,000, a difference of nearly $100,000. How is this possible? The principal reason is that the supply of homes for sale is shrinking, and this scarcity is driving prices up. This disparity between supply and demand is due to two main factors: low interest rates and changes in people’s housing needs, all of which is a consequence of the pandemic we are living through.

—Factor #1: Low Interest Rates 

The first reason there is such a difference between supply and demand is the low mortgage interest rates. While you may have purchased your first home in 1990 with a 13% mortgage rate, in the past year some have signed their first mortgage with a rate varying between 1.5% and 2.5%. The Bank of Canada decided to slash the rate at the outset of the pandemic to stimulate the economy. As a result, thanks to these low rates, people can now afford a mortgage that is 20% higher than in 2019. Moreover, according to Statistics Canada, despite the many job losses in 2020, Canadian household disposable income jumped 10.6% in the third quarter of 2020 compared to the same period in 2019.

No wonder so many are tempted to swap their little city apartment for a house in the suburbs. Indeed, according to a report published by JLR, there was a 6.9% rise in the number of mortgage contracts—that is, an increase of 246,000 contracts— signed at banking institutions between 2018 and 2019.

—Factor #2: The Change in People’s Housing Needs

The second reason for the gap between supply and demand is individuals’ desire to change their housing to better match their new lifestyle. The pandemic has greatly impacted people’s lives, and as a result, lots of buyers have modified their wishlist. Working and studying from home has forced many to reorganize their daily routines and they want to improve their quality of life by moving. Some are looking for greater access to nature, a community-oriented lifestyle and proximity to local shops and services. According to a survey conducted by RE/MAX in 2021, 38% of those interested in moving in the next 5 years would consider buying a rural property. We live in uncertain times and there is a real desire for peace, quiet and happiness. So, what could be better than a new home? Multi-generational homes are popular, too. Having had their world turned upside down, people are looking for a renewed sense of meaning in their lives and this often requires a shift in their priorities.

Clearly, the rise in house prices is the result of a combination of factors and price is proof of how closely supply and demand are tied. The law of supply and demand, a theory that applies in all commercial sectors, states that it is the interaction between sellers and buyers that determines a good’s price. In real estate, this is defined as the ratio between the available stock of residences on the market and the desire or demand of buyers to purchase a home. This is what ultimately determines the cost of properties. Real estate brokers are not in some way driving up the price of homes, as some would have you believe.

Have your own real estate ambitions? Contact a RE/MAX broker today.

RE/MAX Québec

By RE/MAX Québec

By RE/MAX Québec

A leader in the real estate industry since 1982, the RE/MAX network brings together the most efficient brokers.