Home ownership is considered a rite of passage for most adults. Whether it’s a house or condo, people of all ages and stages in life want to own their own home. Currently, 2 out of every 3 Canadian households own the home they live in.
The challenge for many Canadians is the cost of buying a home, which continues to rise. The national average home resale price in March was $369,677, which is buoyed by the Vancouver and Toronto markets, coming in at $761,742 and $504,117 respectively.
Prospective home buyers feel pressure to “get in” before being priced out of this hot housing market. The banks recently tried capitalizing on this sense of urgency, promoting record low 5-year fixed rate mortgages for a limited time.
Related: First Time Home Buyer: HBP or TFSA?
So should you buy a home now and take advantage of ultra-low interest rates, or should you wait until housing prices come down from their record levels? Let’s explore the pros and cons of waiting to buy a home:
Waiting to buy a home: Pros
Housing prices may fall. In hot housing markets like Vancouver and Toronto, waiting to buy a home can seem like a losing proposition. But consider the impact of a 10% decline in Vancouver housing prices, which would bring the average house price down to $685,000.
For Vancouver residents, waiting for housing prices to fall by 10% means saving more than $10,000 in interest payments over a 5-year period (assuming a 10% initial down payment).
Save up a larger down payment. We wanted to buy a new home several years ago but we ended up waiting more than 18 months before building our new house. During that time we saved up enough money to put 20% down on our new home, avoiding costly CMHC insurance premiums.
When you have a $300,000 mortgage and only put down 5% of the initial purchase price, you’ll pay an additional $8,250 in CMHC insurance premiums. Saving up a larger down payment is tough to do, but it can save you thousands in fees.
Waiting to buy a home: Cons
Housing prices may continue to rise. Most people believe that Canadian housing prices are due for a major correction in the short term. Plenty of would-be home buyers are staying on the sidelines waiting for the housing bubble to burst. Yet as prices keep climbing, prospective home buyers risk getting priced out of the market.
If you have a sizeable down payment and don’t plan on selling for 10+ years, buying a home now can be a smart financial move. Just try not to get drawn into a bidding war, where emotions take over and you end up paying well over market price for your new home.
The current economic climate favours buying now. Economists have been warning Canadians since 2009 that these record low interest rates won’t last much longer. Recent signals from the Bank of Canada point to interest rates rising later this year and into 2013.
The low interest rate environment of the past few years, combined with flexible lending standards (5% down, 30-year amortization) have kept housing costs somewhat affordable in Canada.
5-year 2.99% promotional mortgage rates are long gone, but home buyers can still get 5-year fixed rates as low as 3.24% and 10-year fixed rates as low as 3.99%.
With the average Canadian house priced around $370,000, home buyers can put down as little as $18,500 (5% of purchase price) and pay less than $1,500 a month in mortgage payments.
There’s an argument to be made that prospective home buyers should buy now and take advantage of the low cost of borrowing that may not be available in a year or two.
Most of the doomsday scenarios surrounding the Canadian real estate bubble are referring specifically to Vancouver and Toronto. Housing prices are so high in these two cities that, unless you have a sizeable down payment and stable employment, it makes the most sense to remain on the sidelines and wait for a correction.
Housing prices across the rest of country appear to be relatively affordable. Jumping into the housing market now, while fixed rates are under 4%, seems very attractive. Just remember to:
- Stress-test your finances using the posted 5-year rate as opposed to the promotional rate you’ll receive. See if your personal budget can handle a 2-3% increase in interest rates, which you may be faced with when it comes time to renew.
- Put down as much as you can afford, preferably 20%, while leaving yourself a few thousand dollars for closing costs and to cover any unexpected purchases.
Do you think that waiting to buy a home is the smart move right now? Or should prospective home buyers take advantage of low interest rates and jump into the housing market now?