Why is the Ottawa real estate market so hot right now?

The Ottawa real estate market has always kind of marched to the beat of its own drummer. We are insulated from the highs and lows of markets like Toronto and Vancouver because of the steady presence of the public service, universities and increasingly, the high tech sector. But the difference between the Ottawa market and those markets is stunning right now: while Toronto and Vancouver house sales are down – Ottawa’s are up. Wayyy up.

I had a fixer-upper on the market two weeks ago: we had fifty showings (50!!!) in two days and 16 offers. (I believe that’s an office record but one that, in this market, will soon be beat.) It sold for $ 40K over asking, firm, no home inspection, no financing clause. And we’re seeing more and more of those. Almost nothing is selling without multiple offers. Buyers are getting frustrated as they lose out on offer after offer.  And as they get more desperate, they pay more to compete.

Our inventory is at its lowest level in years. We’re down something like 40% from five years ago, and around 20-27% year over year in certain areas. Sellers simply aren’t listing their homes for sale. With demand as high as ever and significantly lower inventory, anything decent is being pounced on in bidding wars, which is driving prices higher.

Why is this happening when nationally, sales are down? Well, I think there are a few different factors at play but they all come down to one root cause: the new mortgage stress tests.

The new mortgage rules were introduced to tamp down demand in Toronto and Vancouver but they apply across the country. They make it much harder to borrow money, particularly if you are self-employed.

The new stress tests require that buyers qualify at a higher rate (two per cent above the posted rate or the rate being offered to them, whichever is higher). They used to only apply to buyers who didn’t have a 20% down payment, but now they apply to everyone, regardless of how much cash they have for a down payment.

The effect is to reduce buyers’ purchasing power by roughly 20 per cent; if you qualified for a $ 600K property last year, now you only qualify for a $ 500K one. That’s a huge difference!

But surely an inability to buy as easily as before would depress the market, and not drive it higher? Well, paradoxically, no. It’s the law of unintended consequences.

The new mortgage rules  make it harder for retired and semi-retired boomers, who have lots of equity in their homes, but reduced income, to get the financing they need to be able to downsize.  They would have to sell their homes first to free up the cash they need, as bridge financing (the loan they need to be able to carry two properties during the period between sale and new purchase) only applies if your home is sold firm already. And with the inventory so low, and getting lower it’s risky to sell first: even if they can find a property they love, in this kind of market it will probably get multiple offers, so they have no guarantee they won’t be homeless. And so for now, they are staying put.

At the other end of the spectrum are first time buyers. The new mortgage stress tests were intended to dampen home prices so that purchasing a home would be more affordable for them, but again, paradoxically, they’ve made buying more difficult. If they can’t afford to buy, they have to rent. Which is driving the demand for rentals higher  (we are at 1.7% vacancy rate in Ottawa, which is way below previous years).

And so the under $ 400K housing market has gone wild. It’s the more affordable part of the market and it’s now of interest to investors who see that rental demand increasing. They tend to be cash buyers. The foreign buyers tax in Vancouver and Toronto is driving foreign buyer/investors here in droves.

Townhouses in Hunt Club, to give an example, that were listed at $ 330K last year are selling for $ 380K and up. In fact, I sold a townhouse just over a month ago for $ 350K with multiple offers: two weeks later, one two doors down in almost identical condition sold for $ 370K. That’s a twenty thousand dollar increase in only two weeks!

The condo market is finally moving again too, for all of these reasons. After several years of stagnation, as inventory tightens and buyers look for less expensive housing options, they are turning to condos as these are less expensive than freehold properties. That’s driving those prices up too — for the first time in years, I’ve seen multiple offers on condos.

The result is that federal mortgage rules which were meant to depress the housing market in cities like Toronto and Vancouver are inflating prices in more affordable cities like Ottawa. Add in the impact of the new LRT, a renewed tech sector, and the other benefits of a city like Ottawa to foreign investors, and the Ottawa market is super hot and likely to stay that way for quite a while.  Which makes a great time to be a seller, and a terrible time to be a buyer: the very opposite of what the government intended.

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