I recently talked with a young lad who is making the leap into home ownership. He has a budget under $300,000 and is willing to travel 30 minutes outside of Kingston. He is a bit reluctant whether he will find anything. And to be honest, I’m nervous for him as well. What use to be a healthy budget for the first time buyer, home ownership is slowly slipping away from many first time home purchasers. On top of high home prices, the federal government along with the regulator has announced a new “Stress Test Rate” of 5.25% for all new or refinanced mortgages whether uninsured or not. Prior to June 1st, the Stress Test Rate was 4.79% for uninsured mortgages. (Insured mortgages are mortgages obtained with a down payment of less then 20%)
A joint Nanos and Bloomberg poll last month revealed that Canadians would welcome interest rate hikes to cool down the run away housing prices. It is questionable whether this would actually have any affect because the Stress Test in place already tests buyers to a much higher rate of 5.25%. So increase a 2% rate to 2.5% will have basically no affect.
Interest rates are slated to rise in 2022 because the economy is doing much better than anticipated due to the pandemic. According to Dr. Sherry Cooper, chief economist of Dominion Lending Centres with respect to whether interest rates rising quickly would slow down the run away prices, “it would reduce buying power. The question is would it lead to a decline in home prices? It would take quite a tightening in monetary policy for that to happen, and tightening is unlikely.
“Even the housing market isn’t one market nationwide; it’s many, many different markets, so we could see home prices reverse in one area or one sector without seeing it happen in another. To see the overall average home price decline, which means it would have to be a widespread phenomenon outside of both Toronto and Vancouver, it’s not that it can’t happen but it’s unlikely.”
So my advise to the young lad and to all potential buyers is that regardless of the current status of the market, your home is an investment and when we look at the long term, like all investments, it is never a straight line up. We will always have ups and downs but real estate has always been a sound investment for the long run. It is difficult to time the market, as is with everything in life and hind sight is always 20/20 but you got to jump in. Whether it is a big home or small… just jump in. Will it be perfect… NOT EVEN CLOSE!! But it will be yours and your equity will grow and when your financial position gets stronger… you can up-size your life.
As my mentor, Brian Buffini has said “Don’t focus on the mountain; focus on the step”
If you don’t take that first step, there will never be the mountain to climb.