Should I buy now with interest rates still hovering at record lows, or wait for prices to fall? When will house prices fall? … and by how much? What will the interest rate be in the future when house prices fall?
These are the questions most Canadians asking themselves these days. It’s no secret that Real Estate values are at an all time high in most parts of the country. The calls for a housing correction, crash, or bubble have been going on for almost 10 years now but it hasn’t materialized.
I won’t get into the discussion here about whether house values will drop or crash or when that could happen.. because I don’t think it should be part of the buying decision. That’s not a typo. Market timing is a dangerous thing. Stock advisors will tell you this. Buy now, if you are able to commit to the plan. Read on to see why I believe this to be true.
LET’S ASK THE RIGHT QUESTIONS
Maybe we’re asking the wrong questions? We need to approach Real Estate ownership with a different philosophy. And it doesn’t matter whether you’re buying a home to live in or rent out as an investment. If you stick with this strategy, the chances of you ever losing in Real Estate are slim to none. I think this strategy should be applied for all purchases.
- BUY AND HOLD. Buy with the intent of holding for 7 years or longer. Why 7 years? This seems to be enough time amortize any expenses associated with buying and selling a home… You know, real estate commissions, legal fees, land transfer taxes, etc. And hey, if you’re an investor and bought a home where the value has gone up significantly in just a few years then maybe it’s worth selling. No one is stopping you.
- SO WHAT IF PRICES DON’T GO UP. We keep forgetting our history. Real Estate almost always goes up in value. How many of us wish we bought 5 years ago when prices were lower?… or 10 years ago or 15 years ago? How many of us know an uncle, friend or someone that bought 10, 20, 30, 40 yrs ago? What’s that place worth today? Using the 7 yr rule, we know that prices can go down in any economic downturn, but they will usually rebound and be higher than they were 7 yrs ago.
- DON’T FORGET, YOUR MORTGAGE WILL GET SMALLER. Let’s say you had a $500k mortgage today.. and you took a 5 yr fixed rate (I would recommend Variable for most of us today but let’s use fixed for this illustration). In 5 years your balance will be $431k.. That means you will have paid down your mortgage by $70,000!. That’s building equity. No gimmicks. If you don’t buy today, and decide to rent and wait 5 yrs, you will have lost $70,000 in potential equity in your home.
- BASE YOUR MORTGAGE PAYMENT ON TODAY’S 5 YEAR FIXED RATE. If you truly believe rates will go up, then start paying your mortgage based on today’s posted rate. This will get you ready for any rate hikes and you will pay down your mortgage 10 YEARS SOONER.
THE COST OF HIGHER INTEREST RATES IN THE FUTURE AND IF YOU SHOULD WAIT TO BUY. Ok, so you take the pessimistic approach and wait for a potential housing correction with the hopes of buying for less. Hey, it’s hard to argue with buying for less, but are you really saving any money by waiting? Take a look at the example below. Most highly recognized Experts and Economists don’t see a any big housing drop. They are forecasting for a flat to modest price increases this year and for a flat market in 2015 and for an increase in housing demand and prices in 2016!
The pessimists have been writing about how values will drop by 10% or more for the past 8 or 9 years… (I sometimes think if they say it long enough, eventually, it will become a reality…. but then what would the media write about.? Lol!) Let’s see how this would play out over the next 5 years.
A 15% drop in house prices in 3 years. (By the way, 15% is pretty significant drop. We haven’t seen anything close to that kind of drop since 1989-90 when we saw the last real recession. Back then, house values dropped by between 25% and 50% in just 6 months, BUT, they also went up by 30% to 50% in the previous 2 years leading up to that correction. We haven’t seen anywhere near that sort of short term price appreciation. )
- 2014 HOUSE VALUE $625,000
- 2017 VALUE, 3 YEARS LATER $531,250
- BORROW 80% OF THE PRICE = $500,000
- 5 YR FIXED RATE MORTGAGE 3.50% (I like Variable rate as it will save you around 1.00% but for this purpose, we will stick with a 5 yr fixed)
- MORTGAGE PAYMENT $2497/mth
- FORECAST RATE INCREASE OF 1.50% IN 3 YRS (this seems to be the number that less optimistic experts are using.)
- 2017 MORTGAGE BALANCE, 3 YEARS LATER $460,000
- 2019 MORTGAGE BALANCE, 5 YEARS LATER $431,000
- IN 2019, THIS PERSON WOULD ONLY HAVE 20 YEARS REMAINING ON THEIR MORTGAGE.
- IN 2039, THIS HOUSE WOULD BE PAID OUT.
WAITING 3 YEARS AND HOPEFULLY, SEEING A 15% DROP IN HOUSE PRICES.
Assume you rented out a comparable home in the $625k range..
- 2014 RENTS $3125/mth plus utilities (seem to be going for between 0.40% 0.60% of house values today. For this illustration, let’s use 0.50%). (and have you ever seen rents go down? No, they go up… remember this when considering a rental property investment too!)
- RENTS ARE $628/MTH MORE FOR 3 YRS VS BUYING TODAY (but let’s not focus on this.. let’s say this covers property taxes if you had bought a house.. and some maintenance of the house).
- 2017 PURCHASE PRICE, 3 YEARS FROM TODAY AFTER 15% PRICE DROP $531,250.
- BORROW 80% OF THE PRICE = $425,000.
- 5 YR FIXED RATE IS 5.00%
- 2017 MORTGAGE PAYMENT $2471/mth. (Notice how your mortgage payment hasn’t really changed from the 2014 amount).
- 2017 MORTGAGE BALANCE IS LOWER AT 425,000 (you are ahead by $35k based on the lower purchase price).
- 2019 MORTGAGE BALANCE, 2 YEARS LATER $406,896
- IN 2019, THIS PERSON WOULD HAVE 23 YEARS THEIR MORTGAGE.
- IN 2042, THIS PERSON WOULD STILL OWE ANOTHER 3 YEARS OF MORTGAGE PAYMENTS. THAT’S ANOTHER $88,956 IN MORTGAGE PAYMENTS STILL OUTSTANDING.
In this example, even with house prices going down 15% over the next 3 years, it does not make sense to wait. You lose 3 years of paying down your mortgage. This one small but very important point seems to be overlooked by almost all the Experts. BUYING NOW MEANS YOU WILL OWN YOUR HOME SOONER! Even when taking a pessimistic outlook. Wouldn’t you want to own your home sooner?
Your best interest is my only interest. Today’s best rates aren’t always published as more Lenders offer unadvertised rates. Buying, refinancing or renewing your mortgage? Contact me for the best rates and terms.
As always, I welcome your comments, calls and questions.
Steve Garganis, Mortgage Broker and Editor CanadaMortgageNews.ca 416 224 0114 firstname.lastname@example.org