No surprise here – the latest housing data shows real estate prices continue to climb in Canada. And, with ultra-low interest rates predicted to last well into 2016, there appears to be little relief on the horizon for buyer demand.
In the last week, I have had two friends reach out to me for housing affordability advice. One is struggling with moving to a more expensive part of the city in exchange for better childcare options. The other is a first-time home buyer that just wants to get into the market before prices rise any further. I can understand their trepidation; there is overwhelming evidence that our real estate prices are overheated and due for a correction.
Whether you are looking to upgrade or get into the real estate market for the first time, here is my advice for all Canadians amid today’s rising trends.
The World is Watching
Canadian home prices are outpacing others across the globe. According to a new Scotiabank report by Adrienne Warren titled Global Real Estate Trends, Canada’s rise in real estate prices is the fourth highest in the world. Warren writes, “Canadian home sales and pricing are proving resilient in the face of a more challenging economic environment, buoyed by ultra-low borrowing costs and favourable home buying demographics.” It’s no wonder experts are are concerned, citing heightened economic uncertainty and a soft job market, which Warren says are main market headwinds. She states, “Among the more robust housing markets globally, including Canada, Australia, the U.K. and Ireland, stretched affordability could pose an increasing challenge.”
A Surge In New Home Builds
While a spike in new home construction may seem like a positive move, it may not be good news for current homeowners, who could see their home prices slide due to increased supply. According to Canada Mortgage and Housing Corporation (CMHC) most recent annually adjusted report, in September work on new homes was up 7.7 per cent to 230,701 units. In the report, Bob Dugan, CMHC’s chief economist, says, “The trend in housing starts is at its highest point since January 2013, as a result of the launch of some major rental housing projects as well as continued strength in condominium construction.” He adds, “as a result, trend activity is now above the projected annual pace of around 190,000 new households. This underscores the continuing need for inventory management to minimize the number of completed but unsold units.” So buying today with the expectation that prices will rise should be managed appropriately.
A Tale of Two Cities’ Markets
We all know housing prices in Toronto and Vancouver are among the highest in the country, but it’s important to break it down and compare in order to really understand the role these two cities are playing when skewing the national average. For example, the average price of a home in Canada in September was $433, 649. By comparison, the average home in Toronto sold for $627,395, and in Vancouver it was even higher at $857,015. These prices include detached and semi-detached homes as well as condos. And, in many cases, the number of smaller homes going for higher prices are in Toronto and Vancouver. In July, Royal Lepage reported that a detached bungalows was selling for $316,732 in Winnipeg. Indicating that prices are much more affordable on much larger homes once you leave two of Canada’s largest cities.
Same Rules of Affordability Apply
No matter where you’re thinking of buying a home, it’s important to consider the following when calculating your affordability – could you pay your mortgage if it was 2 – 3 points percentage points higher? If you can, set up your payments from the beginning as if your rate was more. This will prepare you for a rate hike and help you pay down your principal faster. As well, always keep in mind the extra costs of home ownership, property tax, utility costs and commuter fees. Many of these can be higher if you live in a smaller centre. And, always look 5-10-15 years in advance. Ask yourself will this house satisfy my long term needs? Buying a house that you have to move out of too soon can cost you. By staying put you build equity and avoid any expensive moving costs.
Want to learn more about the costs of home ownership? Check out our First Time Home Buyer’s Guide>