(May 8, 2024)
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In the Canadian real estate landscape, a significant segment of potential buyers are engaged in a strategic waiting game, anticipating a drop in interest rates before diving into the real estate market. The allure of lower borrowing costs is undeniable, promising substantial savings over the long term – but is it really? Amidst this anticipation, a crucial question looms large: does the potential impact of a rate drop outweigh the potential price appreciation in the real estate market?
Examining this delicate balance of financial math and market movements reveals that there’s more to the story than you might have thought. Here are some key markers that have prospective buyers in a loop as they ponder their next move.
interest rates.
Two key outcomes stem from interest rates: mortgage qualification amounts and affordability. As is the case today, to qualify for a mortgage, you are subject to a qualification stress test. This means that your qualification is based on a rate that is 2% higher than the actual rate (aka the 2% stress test). So, just qualifying for a mortgage is a feat in and of itself. Now, once you have qualified, the next reality is your new monthly payment. Is it affordable to you, and is it something you can sustain in the long term? If you’ve successfully overcome these two qualifying factors, you are good to go! Right? Yes, but here’s the thing. Buyer psychology is still keeping many on the sidelines, and the prevailing thought seems to be that a deeper discount is expected in both interest rates AND the real estate market. If this plays out, you will have claimed victory in the most satisfying way: lower interest rates and slumping real estate prices. But, what if it doesn’t play out like this?
what if demand increases as interest rates go down?
This is the question that has central banks and economists in a spin right now. With the current state of affordability (in many regions across Canada) in crisis mode, the Bank of Canada continues to hover their foot over the brake pedal while cruising at a slow speed. The question is on every buyer’s mind. Should I take the hit and buy now with a higher interest rate while the real estate market is somewhat subdued? Or should I wait to step in until I see convincing evidence that interest rates have firmly begun their descent? Let’s apply this question to two markets that I follow closely: Calgary and Vancouver.
Only a 30-minute flight separates these two cities, but the current market conditions are stratospheres apart. Vancouver has come off a decade (or two) of insane appreciation and warfare-like real estate trading, but over the last couple of years, one factor has finally prevailed as an opposing force to the market: high-interest rates. We have finally discovered the boiling point of Vancouver’s real estate market, 7.20% (Canada’s general consumer prime rate). Although fixed rates have slid down to the low-mid 5% range, the prevailing interest rate sentiment seems to constantly revolve around the much more publicized Bank of Canada Prime Rate. Without getting into lengthy detail, the overall summary is that despite the high rate environment, the average price has, for the most part, maintained its level with slight variances in either direction (with the exception of a few downtown condo segments where days on the market stats have skyrocketed, and price adjustments have countered accordingly). Otherwise, single-family dwelling sales have eased, townhomes continue to be sought after for the growing move-up segment, and condos have opened up somewhat in particular regions where bargains can be found. But that’s about it, no groundbreaking plummet or crash to speak of, just a pause with a stay-tuned type of vibe. But enter April statistics, a 40% increase in inventory. Is this a 1-month anomaly? Or is it a pattern that will persist in the coming months? We shall see. I’ve always maintained the same conclusion for Vancouver. It’s not a boom-bust type of environment but rather a boom-pause. Mountains to the north, ocean to the west, agricultural reserve to the east, USA to the south, and NIMBY’s filling up all the other cracks…although it may be a zig-zag trajectory, Vancouver is not moving anywhere but up for the foreseeable future, just a question of when and what frequency. Waiting for rates to fall and sway the market in your favor could be a tricky play. If/when a correction does occur, it will not ease affordability significantly. For many, the price reduction will be a personal victory that they could have survived without. But for those who are looking for a knockout punch to the price of real estate in Vancouver, look eastward. Like 12 hours eastward, Calgary.
Calgary is living up to its Wild West past. The past decade or so has been rough, especially with the enormous resistance to Alberta’s oil and gas sector. Rather than generating loads of high-paying jobs and massive economic windfalls, the oil sector has maintained a solid blue-chip type of existence as it churns a steady supply of oil to the US. Sounds good and awesome, but it is quite a flakey arrangement when you think about it. We’ve essentially secured a legacy customer, the USA (hooray!), but we’ve done so at low margins (crappy!). If you weren’t aware, other than the limited capacity of the recently re-opened and slightly expanded Trans Mountain Pipeline (TMX), oil producers in Canada are (basically) not allowed to transport their product anywhere else in the world (east or west coastlines), not at a substantial scale anyway…imagine selling our oil at market prices at a grand scale? Things would be so much different than they are now…I digress. Anyhow, here’s the thing with Calgary; it’s got everything you’d expect from a major city, except at a smaller, cozier scale. This is what makes it special. It’s certainly debatable when the affordability bubble in Calgary will burst (some argue it already has), but from a Vancouver or Toronto lens, it’s still a hot bargain. If you’re a native Calgarian and are uncomfortable with today’s real estate trend, I would say, get used to it and adapt because there’s no evidence pointing to a reverse. Know this; while you (Calgarian) ponder about getting into the market, someone in Ontario (or BC) is packing their U-Haul and beginning their journey to your neighborhood, and they’re bringing with them a substantial down payment to compete against your bid on a property. With that being said, you can still purchase a single-family dwelling in Calgary (1500 sq ft, garage, yard) for under $600,000. If you’re from Vancouver/Toronto and have just fallen out of your chair, you heard that right. You can own a house for under $600,000. And about 3 hours north of Calgary is Edmonton where the numbers pencil even better.
conclusion.
As a mortgage broker, I’ll admit I come with a bit of built-in bias, so take my advice with a grain of salt. But here’s the thing: waiting for rates to drop or markets to cool down might not be the best strategy. If you’re financially ready and qualify for a mortgage, consider jumping in sooner rather than later. I’d rather pay a bit more now for the security of owning a property than be stuck in a perpetual state of real-estate-over-analyzer syndrome.
Let’s break it down: Imagine a $700,000 property in today’s interest rate climate, with a 10% down payment and a 5.39% fixed rate over 25 years. Your monthly mortgage payment would be around $3,800. Now, suppose you wait until next year and the fixed rate drops by a whole percentage point to 4.39%, resulting in a monthly payment of $3,450 – saving you $4,200 annually. Meanwhile, real estate metrics in both BC and Alberta suggest prices could rise by around 7%, but to stay conservative, lets work with a 3.5% rise, potentially netting you a gain of about $25,000 on that $700,000 property.
Now, compare that potential gain with the difference in your mortgage payments over 12 months – $4,200 (in mortgage savings) versus $25,000 (in market appreciation). It’s a no-brainer, right? Plus, of that $3,800 mortgage payment, $1,000 goes directly to your principal, putting you even further ahead.
Consider this: while your dollar sits idle, you could be investing it in a home – still one of the most reliable and tax-exempt assets in our financial system. So, if you’ve been on the fence about buying a home, remember that every dollar you invest now is a step closer to securing your future.
mortgage bits.
To wrap up, here are some insightful mortgage qualification tips and strategies that could prove valuable for the remainder of 2024. Feel free to reach out to me directly for a more in-depth discussion:
Variable rate mortgages are a savvy choice in today’s interest rate landscape. They offer a unique feature allowing you to switch to a fixed rate at any point during the term. For instance, if you secure a variable rate at Prime-0.90% while fixed rates are currently hovering around 5.29%, you have the flexibility to wait for potential rate drops before locking in to the prevailing rate at any time into the future within your 5-year term. So, if you enter a variable rate mortgage today at 6.30%, but witness the 3 yr rate drop to 4.25% next year, you can call up your lender and ask to exit your 6.30% variable rate and lock into the 4.25% fixed rate.
While variable rate mortgages have their advantages, they may conversely affect your qualification amounts as they typically have higher stress test rates compared to discounted fixed rates. For example, a variable rate at Prime-0.90% could translate to a qualifying stress test rate of 8.30%, compared to a discounted 5-year fixed rate of 4.99% with a 6.99% stress test rate, resulting in a significant qualification variance, especially for mid-to-low income earners. For a $100,000 earner, that could be a $50,000-$60,000 qualification boost!
It’s crucial to dispel the notion that your bank is always looking out for your best interests. One basic thing to remember is that banks exclusively report to and are fully accountable to their shareholders, not you. While you may occasionally secure a competitive rate, banks often capitalize on your trust, potentially leading to less favorable rates and terms. Working with a mortgage broker grants you access to Canada’s top lenders and ensures they compete for your business, rather than the other way around.
DISCLAIMER: Before making any decisions based on the above recommendations, please reach out to me for a personalized discussion. Economic conditions, rates, and market trajectories can change rapidly, affecting the suitability of these suggestions. The sentences formed in this post are my opinions and are subject to change at anytime, without notice.
Thinking if now is a good time to buy? Call or text Marko Gelo right now at 604-800-9593, or Click Here to schedule a free, no-obligation phone call with Marko. You can also call Marko on WhatsApp.
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