Welcome to this month’s installment of Dear Urbaneer, where we tackle tough housing questions put to us by our clients. This time around we chat with a client who wonders if the timing is right for him to buy a home.
Dear Urbaneer:
I may be a first time homebuyer, but I’ve spent countless hours preparing to become a homeowner. Over the years that I’ve been putting together my down payment, I’ve been paying attention to other things, like market momentum and media reports. I also know that real estate markets work in cycles. It seems to me that there is a lot of press from the government and from analysts warning about a real estate bubble. It makes me nervous that I might be buying at the height of the market, only to watch it pull back.
On the other hand, the discussion about a bubble has been happening a long time, while prices just keep climbing. I worry if I wait too long, I might not get into the Toronto real estate market at all which makes me really nervous. Homeownership is an important goal for me. What should I do?
Sincerely, Buy Or Wait
Dear Buy or Wait:
The sentiments that you’ve expressed here are not uncommon, given the length and the strength of the market force that is currently behind Toronto real estate. We’ve touched on this at length recently in both Part One and Part Two of our Spring 2016 Toronto Real Estate Forecasts, where we also explore the engines behind this market momentum in detail, with particular focus on supply and demand and eroding affordability.
And you’re right; nearly every time you turn on the T.V. or flip through the news, there is some sort of alarm bell sounding about the inherent dangers of a red-hot property market. Even during the past few weeks, there have been a fresh round of warnings from some notable sources.
Justin Trudeau recently did an interview with BNN, where he said that the hot markets in Toronto and Vancouver are “creating headwind for Canada’s economy.” (Read the full interview on BNN).
Prominent research firm and economic voice, Moody’s Investment Service, warned that a U.S.-style subprime mortgage market correction could cost lenders in this country $12 Billion, which could mean serious widespread economic turmoil for everyone. Here is the story in the Financial Post called, Housing Crash In Canada Could Cost Mortgage Lenders Almost $12 Billion.
Bank of Canada Governor Stephen Poloz said in the June release of the BOC’s semi-annual Financial Review, “The pace of house price increases in Toronto, and especially Vancouver, is unlikely to be sustained, given underlying fundamentals… Indeed, the potential for a downturn in prices in these markets, although difficult to quantify, is growing.” You can read Poloz’s comments in further detail in this story from the CBC: Bank Of Canada Says House Price Increases In Vancouver, Toronto Likely Unsustainable.
Speaking at a conference recently, Finance Minister Bill Morneau said that they are concerned particularly about affordability in centers like Toronto and Vancouver, suggesting that government intervention may be called for. He expressed specific concern about the role of foreign investment in jacking up prices in these cities. Here is a story about his speech from CTV News called, Morneau: Ottawa Is Doing A 'Deep Dive' On Housing Markets.
Global think tank Organization for Economic Co-operation and Development (OECD) called for Canadian government intervention to cool the dangerously hot markets in Toronto and Vancouver. Click here to read a story about that from the Financial Post called, OECD Flags Housing Correction As Canada’s Biggest Risk And Urges Tighter Rules.
No question, with dire messages like that, it kind of makes you want to head for the proverbial hills and shelve home ownership for the sake of safety and sanity. However, choosing to side step homeownership is not necessarily the answer here, especially if it's one of your goals. If you reflect only on the headlines, you’re not getting the full story; you need context to apply meaning. You also need a prudent plan that will help protect you from receiving a hard blow financially when the market shifts.
When you dig a little deeper into these headlines, the analysts, pundits and government leaders are not suggesting that people steer clear of the housing market because current economic conditions. Rather they are warning that the potential exists for big problems because of the economic fundamentals and the cyclical nature of markets. And when the potential exists, consumers need to tread carefully and make very rational, prudent decisions, which is exactly the kind of real estate guidance and advice urbaneer dispenses on a daily basis.
Here is a story from REW.ca that explores both sides of the buy or wait question, with context given to media reports called, Should Housing Market Warnings Put Your Buying Plans On Hold? The advice is solid with three simple rules. 1) Be prudent with sensible choices without extending yourself; 2) Commit to being financially prepared to refinance your property in five years’ time if it's worth five to ten percent less than today's values, and: 3) Ensure you have the capacity to pay your mortgage if interest rates climb a few percentage points. This could even mean accepting you may need to rent part of your home – if necessary – to make ends meet.
As long as you commit to a long term hold and pay off the mortgage, in 25 or 30 years you’ll be financially grounded with no mortgage debt. The key here is to be able to weather market fluctuations until you don’t have to be concerned about how the market is doing. So, as long as the place is suitable for ten years plus – and feels like Home – it should serve you well. Remember, the only people who lose money in real estate are those who have to sell, not those who choose to sell.
Of Note To Condominium Buyers
If you're thinking of buying a condo (which many first timers are, given the price point and the lack of affordable freehold houses), there are a few special considerations to help preserve your investment. We’ve always contended that the first Achilles Heel of this market rests at the foot of this housing type. This point has been reiterated by the pundits and politicians recently, when they raised concerns about the rise of foreign ownership its impact on rapid price appreciation. Particularly vulnerable to this factor, as well as the potential of oversupply are the myriad of ubiquitous condo towers.
The best way to protect yourself against this potential problem? Invest in the unique – which means that you will ultimately be creating a market for yourself when you want or need to sell. Of particular importance is the real estate trifecta of location: proximity to green space, amenities and to public transportation. We also place value on an intelligent floor plan, parking, outdoor space and quality finishes and design details. Think authentic or modern loft, stacked townhouse with patio or roof terrace, or modern glass cube with panoramic views versus the everywhere high-rise. We’ve written about this a bunch. Click here to read How do I Raise The Value Of My Condominium? and Five Points To Ponder Before Buying A Condominium as well as our past editions of our forecasts. Where would we buy a condominium? It would be in locations where there are the fewest, like the city neighbourhoods of Leslieville, College Street's Little Italy, The Danforth, Roncesvalles and Summerhill. Buying a main street, mid-rise condominium located in a coveted neighbourhood usually means a smaller supply of similar units, which equals less competition. This helps preserve values and increases the likelihood of a price escalation. Remember, the fewer units like yours, the greater the opportunity to increase value.
… But At What Cost?
The other major threat to the stability of the housing market? Buyers who are absolutely stretched to the top of their debt load capacity. While there are benefits to doing so (i.e. it gets you greater choice and gets you into the market, for which we discussed the pros and cons in last month’s Dear Urbaneer: It Is Time To Increase My Budget?), leaving no wiggle room in your monthly budget not only makes you house poor, but it leaves you wide open to financial disaster in the event of one of the many variables interspersed in the market changes.
So, how do you protect yourself against these vulnerabilities? Keep room in your budget to expect the unexpected. Also, play out hypothetical scenarios. For instance, what would happen to your finances in the event of an interest rate hike? Even a little interest rate increase means a higher mortgage payment when your mortgage comes up for renewal. Can you manage comfortably with that? What would happen if you had to refinance in a few years’ time and the market has retracted, even a little bit? Will you own more than you owe, putting you in negative equity? Remember, given the closing and selling costs associated with buying a property, your purchase has to escalate in value around six to seven percent just to break-even when you sell. Here's a past post worth reading called Dear Urbaneer: How Long Does it Take to “Break Even” After I Buy Property?
While you can’t control the economy at large, you can control your own debt-to-income ratio. You can also employ a long term buy and hold strategy, meaning that you’re buying a home for shelter and for a long-term investment that will weather and ride out the ups and downs of the market. Taking out too much debt with a short term investment horizon is a risky move. If you are worried about buying at the top end of the market, as you’ve indicated in your question, by extending your time horizon you’ll be able to ride out the ebbs and flows of the market, with an eye to a solid return on your investment years down the road. It takes years to build real equity. Buying just to make quick money? We caution you on this in Dear urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?
And then there is the other component of home buying: emotional fortitude. Rest assured, the Toronto property market is not for the faint of heart at the moment, especially if you are after a freehold property. You’ve got to have patience and emotional stamina to engage in a lengthy search that may present disappointment before you reach your goal. Want some context to the dynamics of the market right now? Here's A Real-time Tale On The Struggle To Buy Toronto Real Estate In Spring.
What If I Miss Out?
With the lack of stock and the rapidly increasing prices, there is a sense of urgency. However a good decision means knowing all of the risks and addressing them with a plan. It’s true that affordability is an issue and that some people are effectively being priced out of the market. As prices rise, we understand how compelling you'll feel to jump into the market, but it should only occur when it's a sound financial decision that meets your financial goals today, and in the future. The fear or missing out is nothing compared to the regret and potential financial implications of a hasty purchase.
If you're a first time buyer, here's our Crash Course For First Time Home Buyers to help get you started!
At urbaneer, we apply some serious big picture thinking to your house hunt based on our decades of experience and deep research into the market, recognizing how critically important a Home must serve you pragmatically and emotionally. Given research on housing and identity indicates that owning a home – as part of the Canadian Dream – is seen as a sign of financial and personal success, as well as reflecting one as being “biographically on schedule”, Steve and the urbaneer team take great care in the importance a property purchase holds in your life. In fact, our reputation is one where we're more likely to talk you out of making the wrong home purchase than proceeding, because for us the Home has to be just right – and not just right now.
Have questions? Please know we’re here to help!
~ Steven and the urbaneer team
earn you trust, then your business
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
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Dear Urbaneer