ROB CARRICK
A game plan for wannabe home buyers priced out of the market
We’re finally seeing some hopeful signs for the wannabe home buyer who has been priced out of the market.
The
twin cities of unaffordability, Vancouver and Toronto, have cooled down
some. And many other cities across the country are producing more or
less normal price gains that make it possible to buy without committing
financial self-strangulation.
A variety of measures taken by government
have curbed the huge year-over-year price gains seen in the past in
Toronto and Vancouver. Add the rising mortgage-rate trend and you get an
outlook that could mean flat or lower prices. Aspiring buyers, it’s
time to start thinking about your game plan.
To
start, it’s important to understand that rising mortgage rates are as
much your enemy as your friend. Cumulatively, higher rates could be the
mallet that pounds housing prices lower. But for now, higher rates just
make home buying more expensive.
We’ve
seen rates for fixed and variable rate mortgages rise about 0.25 of a
percentage point or so in the past couple of weeks. If you paid the June
national average price of $504,458 for a house and put 10 per cent
down, this rate increase would boost your monthly mortgage payment by
about $60 over what you would have paid previously.
Let’s
say mortgage rates go up another 0.25 of a point and housing prices
pull back 5 per cent. Combined, these two developments would cut your
costs by a bit more than $50 compared to current costs.
You’ll
start to turn the corner on better affordability if price declines
deepen. If rates rise 0.25 from current levels and prices fall 7.5 per
cent, your monthly payments would cost $107 less than they would today.
With a 10-per-cent price decline, you’re saving $162.
Keep
your eyes on prices as mortgage rates rise. You need a serious price
drop for higher mortgage costs to work for you rather than against you.
Protect
yourself from higher mortgage costs by locking in a rate right now. To
get the lowest possible rate, you need to understand some changing
dynamics in the mortgage market. Mortgage brokers have long had a strong
competitive advantage over banks in that they could access rates from a
wide variety of lenders, some of them able to beat the banks both on
rates and terms such as prepayment penalties. But Rob McLister of
RateSpy.com said changing conditions in the mortgage lending business
have reduced the ability of brokers to offer bank-beating rates.
“More
than ever before, consumers need to shop multiple lenders and brokers
to get the best rate,” he said in an e-mail. “They cannot rely on one
bank or one broker.”
Mr. McLister said
brokers still lead the market in some cases, notably mortgages where you
have a down payment of less than 20 per cent.
A wannabe home buyer’s game plan has to balance both financial and emotional aspects. A tool like our Real Life Ration calculator
will help you figure out how much house you can afford while still
meeting other financial obligations such as saving for retirement. But
if house prices fall to levels that work for you, will you be able to
pull the trigger?
A big drop in the
price of any financial asset – houses, stocks, gold – tends to scare
people away. They figure they’ll want until prices bottom, and then get
in. The flaw in this reasoning is that people often wait too long and
end up buying after a big rally.
House
prices in expensive spots such as Toronto, Vancouver and surrounding
cities are very high in relation to incomes. We could see current
weakness become a full-blown correction in those cities, but only casual
buyers are able to wait for this development.
If
there’s a sense of urgency to your house purchase, find a price point
that makes a home affordable for you and plan to move when the market
comes to you. Your purchase may not turn out to be a great investment,
but that’s okay. Homes are a place to live and raise a family. When they
become investments, we end up with unaffordable markets and a lot of
wannabe buyers on the sidelines.
Higher rates, lower prices
Here's how mortgage payments vary in
various situations where mortgage rates rise and housing prices fall. It
takes a fairly substantial price decline to offset a mortgage rate
hike. The following monthly payments are based on the average Canadian
house price in June of $504, 458.
| What if… | |
|---|---|
| Mortgage rates were at spring levels | $2,106 |
| Mortgage rates are at current levels | $2,164 |
| Mortgage rates rise 0.25 of a percentage point from current levels | $2,224 |
| Mortgage rates rise 0.25 of a percentage point from current levels, but prices fall 5 per cent | $2,113 |
| Mortgage rates rise 0.25 of a percentage point, but prices fall 7.5 per cent | $2,057 |
| Mortgage rates rise 0.25 of a percentage point, but prices fall 10 per cent | $2,002 |
CREA, Mortgage Group online calculator
Follow Rob Carrick on Twitter: @rcarrick
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