Housing affordability has been a problem in the metropolitan areas of Vancouver and Toronto for decades now. In the past couple of years, the rest of the country has experienced similar spikes in real estate prices, to the point where historically slow-and-steady markets like Edmonton and Winnipeg have seen massive home price appreciation. To make matters worse for prospective buyers, mortgage rates have roughly tripled since 2021, from less than 2% to over 6% for a five-year fixed rate mortgage.
But it isn’t all negative news for those looking to buy. Even with high prices and high financing costs, there are still good reasons to enter the real estate market.
- You are stress-testing your finances.
There were a few lessons learned during the 2008 financial crisis which saw millions of Americans lose their homes. In the early 2000s, prospective buyers were approved for massive mortgages with low introductory rates without proof of income, which ultimately fuelled a real estate bubble. When rates climbed and borrowers started defaulting, the bottom fell out from the real estate market and the global economy plunged into the worst recession since the 1930s.
It became obvious that more stringent lending standards for homebuyers were necessary. Lenders now must account for the impact of rising interest rates and loss of income on ability to pay when approving borrowers for a mortgage. The logic is simple: if things start going wrong, can this borrower still make their mortgage payments?
We are living through the stress tests that were designed to protect borrowers. Could rates climb further? Of course, but chances are we are closer to the end of the rate hike cycle than the beginning. And fixed mortgages lock in your borrowing cost, so further rate hikes cease to be a concern until renewal. If you can cash flow a mortgage at current rates, then chances are you’ll be in a good position when it’s time to renew your mortgage. The central bank’s stated intention is to bring the overnight rate above the “neutral” level (the level at which interest rates neither positively nor negatively impact economic growth) in order to quell inflation as quickly as possible. Once inflation is back under control, it’s likely we could get back into a cutting cycle and mortgage rates will be more attractive than they are today.
It’s fairly likely that your financial burden of homeownership will be higher today than at any point in the future. If you can manage now, it will become easier with time.
And if you’re currently renting, you don’t have to worry about giving up a good mortgage rate when you move into a new home. Beyond this, even if home prices have risen, owning a home still gives you the opportunity to build equity in a property. Even if you’re buying near a market peak, a sufficiently long time period of ownership should at least allow you to see nominal appreciation in the value of your home.
- Market dislocations create excellent opportunities to buy a house.
There were a lot of speculative listings throughout 2020 and 2021. How could there not be? Stories abounded of homes going for $100k over asking (although list prices likely weren’t reflecting market value) and some homeowners wanted to cash in on their largest asset. This is not the case today. Prices have levelled off and mortgages rates have climbed substantially, making the idea of selling and buying elsewhere at a higher rate much less attractive. “Speculative” sellers have dried up. Many of those that will be selling their homes will be doing so out of necessity, be it due to family dissolution, relocation for work, homeownership becoming burdensome due to age, or some other reason. This shifts some bargaining power back to the buyer.
Further, the bidding wars that defined the first half of 2022 have slowed down precipitously, which also works in favour of the buyer. You won’t be compelled to offer way over asking price because 30 other prospective buyers have also bid on the home.
- You need a house.
A house is a place to live, first and foremost. Getting value for your home is great, but it isn’t a required prerequisite for a home purchase. Maybe your life circumstances have changed to the degree where home ownership is now appropriate for you. There are circumstances when the optimal life decision takes priority over the optimal financial decision.
If you can afford to buy and it’s the right time in your life to do so, go ahead and do it. Just make sure it’s a home you’re happy living in. Don’t put your life on hold waiting for the perfect time to buy a house.
For more articles similar to this one (Is it a Bad Time to Buy a House?) by Max Kirouac, click here.
Opinions are those of the author and may not reflect those of BMO Private Investment Counsel Inc., and are not intended to provide investment, tax, accounting or legal advice. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the author nor BMO Private Investment Counsel Inc. shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance. BMO Private Investment Counsel Inc. is a wholly-owned subsidiary of Bank of Montreal.