Welcome to this month’s installment of Dear Urbaneer, where I take on real estate questions from my readers. This time, I’m helping a weary first-time homebuyer who is feeling like their dream of homeownership is fading in the face of rising prices and bidding wars.
I’ve spent years trying to save enough to buy my first home, but I feel like the goalposts keep changing as prices soar. This seems to be happening particularly because of the prevalence of bidding wars, and is discouraging – to say the least! I’m also worried that as the economy restarts, interest rates will increase, which is going to make a purchase even harder. I’m already getting close to my debt ceiling which is making me question whether my dream of homeownership is… unreasonable?
Still Hanging My Hopes On Homeownership
Here’s my reply:
Dear Hanging On Homeownership:
First, let me say – I really feel your anguish. This is the common refrain from first-time homebuyers who have pulled out all the stops over the last several years in an attempt to gain a foothold in the housing market. Affordability, which has long been an issue in Toronto, keeps getting pushed to new limits.
It’s really, really hard, both emotionally and mentally. Hang in there, be patient, and be prepared to revisit your housing criteria to see whether your wishes, wants and needs can be revised. I’ve got some counsel coming up that should help expand your housing options, albeit perhaps reluctantly.
We live in a city where demand consistently outpaces the number of properties offered for sale at most any given time, particularly in the freehold market. Toronto is rich in factors that drive demand, such as the forces of migration (which is expected to resume robustly as the borders re-open, with a particular focus on arrivals relocating from Hong Kong), the competing interests based on demographics (including the Millennial and Boomer cohorts sharing the quest for similar properties), and the growing number of international acquisitions by foreign buyers. While purchasers pursue locking down a dwelling as a private sanctuary and refuge (and yes, also income properties), they’re starting to compete with the expanding appetites of Real Estate Investment Trusts, Pension Funds, and privately held firms like Core Development Group who are strictly focused on the financialization and commodification of shelter as a growing asset-base. Mix all those competing interests with a booming local economy – including a strong, growing tech sector (Did you see my recent post called Toronto’s Booming Technology Economy And Our Real Estate Market?) – and you’ve got a solid real estate market that has been providing consistent returns for 25 years (with the occasional flatline, often due to government interventions).
We also need to acknowledge the psychological aspects of homeownership. That unwavering desire for shelter is imprinted in our psyche from a young age, reminding is that owning a property is one of the trophies of achieving – and winning – the ‘Canadian Dream’. It’s a compelling idea on it’s own, but it’s one that is reinforced by all layers of government invested in convincing us it’s our destiny, and that our quest won’t be deterred by high prices (until they are). Read my
rant post – Why Does Homeownership Remain A Priority For Canadians, Despite The High Costs?
Expanding on the psychological, I have to mention that housing represents much more than just shelter. It grounds us to place, nurtures our well-being, and serves as an incubator to hold our authentic selves. It protects us from everything beyond our front door, serves as a status badge, and signals we are “biographically on schedule” and more. (Have you read my posts about how housing satiates a number of our needs in Maslow’s Hierarchy Of Needs And Toronto Real Estate For Buyers – and – Housing As A Symbol Of Self?)
The temperature of the pandemic-fuelled real estate frenzy has cooled somewhat over recent week, but htis depends on the location and the product. For example, this last week of July 2021 the 2-bed vintage bungalow ‘ready for a refresh or a reinvention’ we listed in Swansea for $999,900 received 16 offers and spiked to $1,650,000! Bidding wars – which have been occurring in Toronto for nearly two decades – are still very much a fixture in the housing market, much to the chagrin of weary buyers. Not only are these bidding frenzies pushing prices higher and higher, it only takes one particularly competitive bidding war to push a property’s value to a new precedent, resetting the price bar for its immediate area.
When you combine a market where supply and demand are out of whack, with low-interest rates that permit homebuyers to extend their budgets – not to mention FOMO and a highly motivated, highly competitive buyers – affordability erodes and erodes.
And this isn’t new. Toronto purchasers actively in pursuit of property have witnessed prices escalate rapidly for years – far outpacing income growth. The most recent stats from TREBB show the average price for a home is now well over $1M, up to $1,089,536, which is up by 17 percent – in a single year! It goes without saying that the average home buyer did not receive a pay increase of that magnitude in the same time period.
And so persists the affordability dilemma.
Hurdles To Homeownership Keep Getting Higher
The Office of the Superintendent of Financial Institutions (OFSI) – a federal bank regulator – recently made revisions to Canada’s Mortgage Stress Test by increasing the minimum qualifying interest rate to either the contracted rate plus two percentage points or 5.25 percent — whichever is higher of the two, as of June 1st, 2021. Although, it was implemented with the intention of reducing borrower (and lender) vulnerability, and the objectivewas to cool a hot housing market and protect property purchasers from loading on too much debt, prospective homebuyers keen to secure a dwelling are more likely to see this as yet another hurdle to entering the housing market.
Bidding wars are becoming common in markets where they were once rare – think small towns and ‘suburbia’ – as people relocate farther away from pricier metros to get “more space, both inside and out”. This came about as we rode the wave of the pandemic, and adjusted to living a life of lockdown where parents and kids collectively worked and attended classes from home.
Here’s a great article from the Globe and Mail: “Home Ownership A ‘Distant Dream’ For Many Canadians As Calls For Action To Cool Frenzied Market Largely Ignored, RBC Says” It comes amidst fervent requests for policy action, including vacancy and speculator taxes, and more. With the possibility for new government policies on the horizon, keep watch for a post coming soon on how policy can impact housing prices in Canada.
Low-Interest Rates Means More Debt
With interest rates persistently low, more people are able to borrow more money. But it’s not just the low interest rates themselves, but the extended period of time that rates have hovered in and around these levels that raise our flag of concern. What we’ve also noticed, is that purchasers have become comfortable maxing out their debt loads under this low-interest-rate environment, mostly as a means to an end. No one wants to go to the top end of their budget, but the competition for better properties pretty much obliges one.
The reality of homeownership today is that most dwell hunters have succumbed – out of necessity or desire – to the lure of cheap money which encourages us to get on the “buy-now-pay-later” bandwagon. This is a bit of a scary prospect – because it is a contrived reality. When the single-focused aim is to secure property in a bidding war climate where the overriding sense of urgency prevails, the winning bidder often says… “What’s another small sum of money on our mortgage payment if it means we get this?”
The problem is that if interest rates increase, even just slightly, for those stretched to the max it could mean financial disaster. In the Bank of Canada’s most recent announcement on July 14, they held rates steady. They did so because they cut the growth forecast for the short term, but increased growth the year following, as they expect consumer spending to swing up sharply as we emerge from the pandemic, and with-it chances are there will be a rate hike.
When are rates likely to go up? And what are the implications? For these questions, we consulted Jake Abramowicz (now The Mortgage Jake Team) for his insight.
“As we (finally, maybe) see the light at the end of the Covid tunnel, we are going to definitely see higher interest rates in the not-too-distant-future. The questions will be: How much higher? How fast will they go up?”
“As of July 30th, Canada’s DGP is now at 98.5% of where things were before the Great Pandemic began. Truly that is almost unbelievable and although it’s a confidence-boosting stat, we all know that there have been many, many people affected by this pandemic, economically.”
“Unfortunately, the majority of those impacted have been in lower-wage jobs and since 416 et al house prices are so high to begin with, the overwhelming majority of homeowners were not affected by this pandemic. Quite the opposite, with over $200B saved by Canadians – a record we have never seen (and will maybe never see).”
Back to rates. As the economy improves, the Bank of Canada has to start to unwind the low rate environment it has set. Last year, the BoC literally threw a can of gasoline on an already huge fire by pronouncing that “low rates are here to stay” and “Canadians should feel very confident making big-ticket purchases such as Real Estate“. Last year it was not expected that rates would go up until sometime in 2024. Fast forward a year, and now, we’re expecting the Bank of Canada to increase interest rates as early as mid-to-late 2022. Quite an accelerated timeline, wouldn’t you say?”
“Fixed rates hit all-time lows last year and into 2021 and then increased quite rapidly in the 1st quarter. Whereas we saw rates as low as 1.39%ish for a 5-year fixed, today rates are almost 3/4-1% higher, where we are seeing rates from 1.99-2.29 range.”
“That also is quite a jump however relatively speaking these rates are still incredibly low. At 1.99%, 64% of your mortgage payment hits principal (over 25-years), still a very very high number if you consider that mortgage payments are a “forced-savings” model whereby the average Canadian (probably) will accrue more wealth from paying down their mortgage rapidly and the increase in equity than other forms of investment.”
“Where will rates go? One only has to look at the Government of Canada 5 year bond yield found here: https://www.marketwatch.com/investing/bond/tmbmkca-05y?countrycode=bx ”
3 Month Chart:
6 Month Chart:
“To see that long-term, rates DID go up rapidly. Short-term, though. bond yields are staying put due to the potential 4-th wave this fall (that may/not be coming).
Bond yields are driven by investors. Higher yields mean a greater confidence. Overall, though, Canada’s economy has been extremely resilient so there’s no reason to believe rates will be going DOWN again to the levels we saw in 2020.”
“Should interest rates be a big factor in my decision making to buy a house or not? In my view, absolutely yes. If at 1.99%, 64% of your payment hits principal, and at 2.49% it’s down to 57%, and you’re not paying cash for the property, then lower rates will mean a more rapid repayment of the property you wish to buy.”
“It shouldn’t be the only factor, not even close, but it should matter that if you can lock in such a low rate for such a long time, you will do very well at the start of your borrowing arc. HOWEVER – as I’ve said time and time again: the stress-test IS there for a reason. I don’t believe we are headed for rates AT the stress-test of 5.25% anytime soon if ever again, but, don’t fall victim to the #LowRateTrap as I call it. If rates are this low now, why wouldn’t you take advantage and pay MORE to your principal? This is an argument, therefore, not to buy as much as you can afford today (2021). Buy as much as you can afford as if rates were double and you will be fine in the long-term (all else being equal). And, make those payments as if rates are double and you’ll crush that debt even fast.”
Debt Loads Are Growing
This article “Canadian Mortgage Debt Grew At The Fastest Rate Since 2010 Even With Falling Sales” shows that, even with real estate sales falling (from precedent-setting numbers), the outstanding mortgage debt in May grew at the fastest rate that it has in a decade. Simply, people are just paying significantly more for properties.
This article “Over Half Of Canadian Home Buyers Are Borrowing The Maximum They Can: CMHC” refers to the CMHC Mortgage Consumer Survey for 2021 that showed the 65 percent of homebuyers spent as much as they were permitted to buy a home. The poll also showed that heavy indebtedness wasn’t just limited to first-time homebuyers (which is common when you don’t have equity built) but was spread across different buyer segments. Twenty-seven percent of buyers paid more than they intended to, which means that budgets aren’t as firm as they used to be in the context of the current market. Also of note, many homebuyers indicated that unexpected expenses contributed to them overshooting their budgets – for things like moving, taxes, fees, and more. That’s why anticipating costs and building them into the budget is essential.
So – we have established that people are indeed taking on all of this debt – and while they may be able to manage it now – what happens when rates go up. And they will go up. Remember, our low-interest rates were introduced as a short-term stimulus measure.
In the Bank of Canada’s most recent announcement on July 14, they held rates steady. They did so because they cut the growth forecast for the short term, but increased growth the year following, as they expect consumer spending to swing up sharply as we emerge from the pandemic, and with-it chances are there will be a rate hike.
This article, “Pattie Lovett-Reid: Why You Should Pay Attention To The Bank Of Canada’s Interest Rate Announcement” shares that a rate hike is imminent based on several economic indicators – and it’s not just mortgage payments that will get more costly. All debt will get more expensive, which could be significant for those that are maxed out in our current market. It could also mean that for people trying to purchase their first property, or those climbing the property ladder, the passage may be more difficult.
The 1980s Versus Today
The past is usually an indicator of the future in terms of economic and market cycles. Keeping that context, in Dear Urbaneer: Interest Rates In The 1980s And Now, a homebuyer was feeling frustrated like you, about their dream of homeownership growing dim, as affordability increasingly became a challenge. In particular, this buyer was pitting their dream of homeownership against that of their Baby Boomer parents, specifically in the context of interest rates. They wondered how, with sky-high rates in the 1980s versus the ultra-low rates today, they could own a home whereas he could not buy one.
In a nutshell, while higher interest rates make homeownership more expensive, it is the relationship between housing prices and income – plus other debts that negatively impact affordability. In the 1980s, homeowners had to shell out more on a monthly basis generally speaking because so much of the payment would service high-interest costs, but the housing prices were much more in line with incomes. As years went on, their payments reduced their mortgage debt (buoyed during a time when interest rates went down) as real estate values went up which increased their equity dramatically. Fundamentally, it’s how amassing wealth in real estate is supposed to work ideally – and not through “flipping” homes. Check out this sobering post called Dear Urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?
It’s worth pointing out that when rates jumped in the 1980s, the market contracted at the end of the decade, which meant trouble for overly indebted homeowners paying high prices for homeownership (and other debt) that found themselves in a negative equity position. In fact, I started my real estate career in 1990, when property prices continued their precipitous decline for the next five years. It was not unusual to sell a house in Leslieville, Bloor West Village, or North Toronto for upwards of 35% less than what it had sold for in 1989! Unreal, right?!
In MacLean’s Magazine, this article “Why Every Housing Bubble Looks Like The New Normal: This Time Is Different,” Buyers Tell Themselves. They’re Right—Until They’re Terribly Wrong” has some interesting observations on the 1980s housing market versus. today (this article is actually from 2017, but we are experiencing similar market conditions today). The piece talks about the dot com bust in the 2000s and the drop in oil prices in the 2000s as well, where investment was driven rather precariously by the expectation of future value, without much to substantiate it, other than present demand. And the end result? The dot com went bust, and oil sank like a rock – and investors shed a lot of cash.
The same fear exists for housing in such a frothy market – especially if you adopt the philosophy that future value will be higher, just because it is now. Interestingly, from this article, there is this passage from a Globe and Mail article from 1988:
“Mortgage rates are low. Ontario’s economy is superheated … and, to make matters worse, land is in short supply,” according to the piece. “Politicians and tenants’ groups have declared a housing affordability crisis—again—and have called for a tax on speculators’ profits to cool down the frenzy.” … Toronto is becoming a “world-class” city and “acts like a magnet for thousands of migrants from elsewhere in Canada and overseas.” Instead of stocks, “owning a house is now the investment of choice for most of the middle class.” The unlucky masses priced out of the city are looking as far afield as Barrie, Ontario for a home.”
They might be describing 1988 in this piece, but it sounds a lot like 2021 – don’t you think?
Is Homeownership A Reasonable Goal In Toronto?
Although eroding affordability can make homeownership seem impossible, don’t give up on your dreams just yet! The current situation has caused us all to change our strategies and outlook, including tempering it with some strategic vision.
According to this report from OREA, 69 percent of potential dwell hunters in Toronto hope to buy a home, and only 31 percent of respondents have abandoned being able to afford a property purchas here. This is likely becasue 38 percent expect that housing prices will continue to increase in the next year – and 57 percent anticipate housing will become increasingly less affordable in the next five years. Furthermore, 41 percent of Toronto purchasers indicated they’ve found the property search over the last year more challenging – you’re not alone!
But here’s where compromise comes in to play. 42 percent have indicated that they would be willing to move away from the GTA to afford a residence. It’s one option that homeowners are considering as they weight their wants & needs with their budget.
For those with their eyes on the prize, it’s certainly not unusual to explore different options or creative solutions. This article “Home Affordability Crisis A Legacy Of The Pandemic, Says Real Estate Association” includes more information from the same OREA report and also identified Canadians’ increasing desire for alternative models that aid in affordability to become more common, like having the option to purchase equity in a dwelling they are renting as well as co-housing and co-ownership models. Here’s my post called Dear Urbaneer: Can I Sell Part Of My House For Co-Ownership?.
Eliminate Your Wishes, Edit Your Wants & Stick To The Needs
When I work with clients to develop their Personal Housing Matrix – which starts with my Buyers listing all of their shelter wishes, wants, and needs – I’m always curious to know where their priorities lie and what on their list is more of a giveaway. And because every Buyer is unique, this initial exploration is always fascinating to me; you never know what you’re going to hear when you ask “Picture your dream home. Now describe it to me”.
This may sound crazy but, on mulitple occasions, I have witnessed first-hand that no matter how large a property budget a Buyer might have (like, millions of dollars!), they are still going to express dismay that they can’t get everything they want within their price range. This has led me to the conclusion that it is a near-universal human condition to believe one’s budget can realistically secure a certain calibre residence when it can not. Everyone has to compromise.
But that doesn’t mean you can’t end up purchasing a property that is perfect for you. It just means you have to invest more time identifying what is essential, and what is not, keeping in mind that in Toronto your first purchase is rarely your last. Even if it is, then you have many years ahead of you to customize the property so that it is the ideal place to hold space for you as you and your family evolve and grow.
Here’s my post that answers: Dear Urbaneer: How Do I Know This Is The Right Home To Buy?
Observations From The Real Estate Trenches
Building on the editing I menitoned above, here are some further recommendations based on personal expreice with buyers. When you start your dwell hunt, it’s better to keep the search criteria limited to the ‘must-have essentials’ and none of the embellishments. After all, for those who have ever wanted a castle but could only afford a cottage, chances are you revisited the criteria on your Dwell Hunt List to see what items could be removed or refined, and which ones were absolute musts. Right? My advice to Buyers is to start your search with just the ‘Musts’ on your list. For example, if you’re prepared to park your car on the street with a city permit don’t start your search by saying you’d like a private drive. Reconcile this from the get-go, with the understanding that your realtor will show you suitable properties that may turn out to have have onsite parking!
The same goes for wistfully wishing for 3 beds & 2 baths when you really know you could reconcile and fit well into a 2 bed 1bath property – particularly if you’ve set your sights on a coveted location. At the same time, would you consider a slightly larger dwelling in the transitioning neighbourhood abutting the coveted location you desire? Explore what give and take there might be regarding size and geographic boundary.
Also, it’s common for Buyers to initially communicate a preferred property price parameter that is significantly below what they can – and are willing to – spend. I always ask them to “come clean” about the budget from the get go. This is because, consistantly, I see Buyers two months into their search (after four failed bidding wars and witnessing values skyrocket by tens of thousands of dollars since they started their serach) suddenly increase their budget anywhere from $150,000 to $800,000! I always tell them that if I had known they were prepared to pay those higher amounts for a property sooner, we likely would have already secured a better dwelling for a lower purchase price earlier in the process than the options available for their consideration now!
Do not ‘chase’ real estate prices, because you’ll run the risk of never winning the bidding war. Remember, the winner of almost every bidding war has, earlier in their search, submitted bids that reflected their rational educated prudent estimate of value which resulted in their offer ranking second or more compared to the winning bid. What the winners of bidding wars tend to do is they add a bonus premium dollar figure (we call it a bunny hop) to their purchase price so that the offering price is cresting at the very top of value. If your intention is to occupy the property as a personal residence for several years, and you’re financially stable, then paying a premium can be strategic. After all, if the market continues it momentum, what may appear to be ‘Top Dollar” the day after your purchase is posted on MLS may appear to be very good value just one year later!
Given the propensity for the better properties to blind bidding wars and result in setting new precedents in value, when my Buyers are swooning over a property and they ask me how much they should pay I often reply “Go to the top of your budget + $1”. Leave everything on the table so that should another party secure it for just one more dollar than your best bid, you will not have an issue letting go and moving forward on the next listing that aligns with your housing criteria.
This Urbaneer blog is an essential read: Bidding Wars And The Psychology Behind The Hyper-Competitive Toronto Real Estate Market
Want More Property Options To Consider?
If you’re searching for additional options when trying to align your Housing Criteria with your budget, here are some bite-sized recommendations based on my experience in real estate:
• Consider different housing types (stacked condo townhouses versus row houses, for example), or explore less expensive neighbourhoods in the same quadrant of the city as your preferred neighbourhood. Leslieville was gritty 20 years ago, whereas Wallace Emerson only started blooming in the past 10 years. Locations you might consider transitional may be highly desirable, like properties spanning the Eglinton Crosstown LRT.
• Look for dwellings that can easily be converted to have an income supplement, even if it’s for the first five years. You may live in a smaller space to start but annex the second suite as a permanent living space as you become more financially established. A lot of young single Buyers will rent out rooms to their friends to make their housing more affordable. Renting a room was a common practice through the 1900s.
• Are you handy? Does it make sense to buy something that requires more work than you anticipated? A lot of Buyers will be standing in a fixer-upper looking forlorn and ask me whether they can get the identical dwelling but in better condition. I say absolutely, but keep in mind we identified that this house needs a $100,000 cash injection to attend to immediate building deficiencies. That means you can buy this exact house with $100,000 in improvements in this area, but the price will be $100,000 more. In fact, most Buyers will go to the top of their budget because the dwellings are in better condition, and not a lot of first time buyers have $100,000 extra to renovate, but they do have an additional $10,000 to $20,000 in capital to use as a down payment on a more expensive purchase.
• Consider tapping into the bank of Mom and Dad, if that is an option. They might allow you to pay back a load over time – interest free!
• No matter what your plan to purchase is, make sure that you set a budget and avoid the temptation to overshoot it. Don’t forget to include closing costs and do your own personal stress test with your monthly payments. What would happen if rates went up, or if you suffered a loss or interruption of income to pay those debts?
• As affordability becomes more and more of an issue, planning ahead in your real estate strategy is of even greater importance. The intelligent buy is the prudent buy – both when it comes to finding a property that fits your budget and your wish list. For both, you need to understand the purchase in the context of your current life, and what the goals of the purchase are down the road, as well as understand how the activity around your purchase figures into the current property market.
Here are some of my past blogs that will help you navigate the art of compromise:
The truth of the matter is that no matter what counsel someone reads in a blog, there’s a good chance they’ll cross the threshold of a property that makes their heart go thumpety-thump and they’ll likely end up spending way beyond their preferred price parameters anyway. This is okay, as long as you’re not placing yourself in a high-risk venture. If your intuition tells you to spend every cent, then you know it’s a home that will nurture you in return.
A Home well-loved frames you. It holds you up. It makes space for you and those you love to be protected in its shelter womb. The beauty of Home isn’t based on how big, or new, or how shiny it is. It’s how it suits you. It’s how you wear it, and it wears you. And regardless of your financial situation at this moment in time, where most every cent will be rolling into the down payment and the closing costs (don’t forget moving expenses!), over time you can modify the residence to suit your personality with whatever limited resources you may have and, in return, the spirit of your Home will shine, and you will feel content.
At Urbaneer, we pride ourselves in having our fingers on the pulse of the Toronto real estate market. With a multi-disciplinary education on the Toronto housing market including finance, construction, design, urban planning and the psychology of housing and home, plus nearly three decades of renovation, development, sales and marketing experience, we are a unique full-service real estate boutique with a sterling reputation. Do you need help navigating your housing choices, and to determine your next move? Are you a Seller seeking a custom strategy to garner top dollar? We are here to help!
May my team and I be your realtors of choice?
With decades of experience navigating the ever-changing Toronto real estate market, a commitment to promote the sale of properties like yours with interesting and relevant information, and the ability to guide Buyers with credible insights and well-informed guidance, we are here to help without pressure or hassle.
Thanks for reading!
-The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-800
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