I’m going to outline the 3 housing buyer groups most impacted by current market conditions… which are:
- house prices rising
- stock market declining
- declining interest rates
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1. Small-cap investors:
Small cap investors are ambitious, and therefore they are often holding their downpayment in liquid investments (stonks) prior to deployment leaves investors vulnerable to this type of market. Furthermore, small-cap investors are more price elastic than their competitors when it comes to capital cost (interest rates) so they don’t feel the benefit of a rate cut as much. They’re more elastic because
- they’re levered or large-portfolio investors, and often on the B-side anyways
- interest is a deductible expense
- they’re not the one servicing the debt, their tenants are
Middle-class + retirees have prescribed some kind of portfolio theory to their assets, typically using their home as a savings vehicle and futures as an investment vehicle. With stocks declining, they have to be careful how they deploy their home equity on a downsize, which is tough in a price-growth market.
Retirees are also caught in a weird position – in most Greater Toronto Area markets, the property they’re disposing of is relatively worse off than the property they’re acquiring. Typically, they’re trading from a upper- or mid-market product toward a price-floor product. The price-floor is seeing an excess demand scenario, but above it there is equilibrium. This perpetuating the idea that “land scarcity” is the problem, as site improvements (houses) play a smaller and smaller role in the valuation as prices increase.
Finally, retires don’t really benefit from declining interest rates (emergency rate cuts) because they’re not planning on holding a mortgage – this is a major goal in retirement for many.
3. First-time homebuyers
First-timers are basically stuck between applying two polar mentalities to the market
- FOMO (fear of missing out)
- “wait & see”
These buyers want it to be 2016 again, but they can’t afford for it to be 2017 either. This time will be different, right?
First time homebuyers are the most positively affected by monetary policy (rate cut + stress test). This is because they’re typically the highest leveraged buyers in the market, other than investors. By decreasing the capital cost, they get greater buying power and a greater levered return.
The drawback for first-time homebuyers is that they’re shopping closest to the price floor, which is where the most competition is. This means that even if their capital cost is declining, the price of the product they’re seeking is increasing, and this creates a sense of urgency to enter the market. From the data I’m seeing, I’d say buyers are best-suited to save up or borrow-up to the price points where volume is lower.