The last month has been one of the most influential months in real estate ever. Let’s start with the basics of the real estate market, and then apply what the last few huge changes might mean in the coming months. Are high prices the new norm? Or, will the market self-correct?

 

The Short Version

The market is a complex machine, and no one, not even clairvoyants, can outsmart it. With record price growth, and uncertain international waters, eyes are on our market to ensure we can protect our homeowner’s equity, and ensure homeowners can  afford their homes.

Lets talk about:

• What does the trump election mean?
• What do recent mortgage announcements mean?
• Who is CMHC? what is their stress-test? and, what do they recommend to protect our market?
• What would a crash look like?
• And finally; Should I Buy or Should I Sell?

The real estate market is one of the most complicated clogs in the Canadian economy. As of mid-2016, it accounts for half of our GPD growth. It’s against everyone’s best interest to temper the market, or over-regulate the market to the point that prices drop. But, to protect everyone involved, we need to take measures to protect homeowner’s equity, and the jobs of thousands of Canadians. In times of change, our mind turns to protecting our market, which is why after record price growth, and the recent U.S. election, we might have to increase deposits and force buyers to purchase homes a little smaller than they could previously afford.

 

the first hit, limiting funds for buyers with low downpayments

Mid-October, the Department of Finance changed the rules around all insured mortgages, regardless of term. This limits everyone who is purchasing a home with less than a 20% downpayment. Previously, insured mortgages with a term of less than 5 years, or variable rate mortgages had to qualify on the Bank of Canada (BOC) rate, which is currently 4.64%. However, under new regulations, all insured mortgages, regardless of term, have to qualify at the BOC rate. The impact is felt in the total amount buyers can borrow. Previously, buyers could qualify at the lender’s contract rate. Now, they have to qualify at the BOC rate. For example, before the changes, a five-year fixed mortgage at 2.4% was qualified at 2.4%, but now that same mortgage of 2.4% must qualify with the ratios of an interest rate of the current BOC rate, which is currently 4.64%.

The impact of these changes is that buyers with less than a 20% downpayment, have to consider a slightly smaller, more affordable home.

The impact of mortgage changes in a seller's market

Right now we are in what’s called a Seller’s Market. Demand is very high, and supply is low. Because there is, say, 3-6 buyers for every reasonably priced listing in a desirable area, the buyers have to bid against each other on the home. Now that insured mortgages require buyers to qualify at the BOC rate rather than the posted rate, we expect demand in the lower price cohorts to increase. This is because buyers with low down payments are being curbed to purchase homes they can afford, in the instance that interest rates increase. Cities outside the core have seen substantial price increases because buyers are forced to move further west or east to afford the home they need. Developers have also noticed the mass exodus to more affordable options, and have started building larger condos which can accommodate a small family.

 

The impact of the Trump Presidency

The Trump presidency is not forecasted to negatively influence Canadian house prices. When it comes to change, unanticipated change creates the most anxiety and fear. Much of Trump’s campaign was sensationalism to get the vote. Now that he’s president, he’s part of a much larger system that can curb his power if he tries to abuse it.

Many of Trump’s election statements will create a headwind for the Canadian economy. Trump is a real estate developer. He wants to reduce red tape and taxes associated with developing properties, and he believes real estate is a key sector to invest in to boost the economy. The demand in building supplies will be met by Canadian building material suppliers. Trump is also pro-energy, which will give our oil sands a much-needed boost.

Given the state of the capital markets, it remains a mystery what the Federal Reserve Bank will do with the interest rates. A few weeks ago, the Bank of Canada hinted that they were planning to keep their rates the same, or even drop them. But, many of us are now aware that Scotia bank and RBC have increased their interest rates due to bond yields shooting up.

What do the Interest Rate Rises mean?

The danger in interest rates rising, is that some buyers that qualified and could only afford their mortgage payments at our very low-interest rates, might be unable to weather an interest rate rise. In the instance that our interest rates rise too steeply, many of these homeowners might lose their home to foreclosure. In Canada, any mortgage with a downpayment of less than 20% requires mandatory insurance to protect the lender in the unfortunate case the family cannot make the required payments to keep their home. However, our insurers have the capital to weather a major market fluctuation.

 

Insurer CMHC announces they can withstand market crash

In the wake of potentially increasing interest rates, the Canadian Mortgage and Housing Corporation, CMHC, announced the results their stress test. They tested if they could survive a U.S.-style housing crash, a high-magnitude earth quake, or a 4-year drop in oil prices.

The insurer, CMHC, claimed they could survive the forecasted $3.12 billion dollar loss of housing prices dropping 25%, and unemployment rising to 13.5%. Their stress test is in no way a forecast. However, CMHC does recommend we increase the downpayment required to purchase a home.

 

Insurer CMHC announces they can withstand market crash

Real estate ebbs and flows. Sensational news stories make it seem like every home sells far above asking price, and at the same time forecast an imminent crash. In reality, it’s much more complicated than just presuming we are in a housing bubble, or that prices are high and will remain so. What is clear, is that our market is structuring itself to ensure homeowners have enough equity in their homes to ride out any fluctuations, and to ensure they can afford an interest rate hike. If there was a large interest rate hike, or another unforeseen circumstance that affects affordability, we are taking the steps to ensure it doesn’t result in a U.S. style housing crash.

 

Should we buy or sell?

Unless you’re buying cash, the interest rate on your mortgage is more important that the purchase price of your home. You live in the monthly payments, and if interest rates are low, you can afford a more expensive house, and if interest rates are high you can only afford to live in a smaller home.

One of the many benefits of a mortgage, is that you’re paying down a portion of your principle with every payment. That’s money that goes towards paying off the mortgage, and makes you one step closer to being mortgage free. Over a five year period, that payment can really add up. For example, a mortgage loan of $500,000, borrowed at an interest rate of 2.4% has the monthly pay payment of $2,218.10. After five years, the borrower would have paid $84,925 off their principle and so would only owe $415,075 on the balance of the home.

If you account the cost of renting, and the lost opportunity of paying down your principle, most homeowners would still have a higher net worth after a 20% drop in prices than their counterparts over a five-year term. That’s excluding the fact real estate in the GTA has been appreciating rather well. In the last five years, the average sale price of a detached home in the GTA has increased 43%, and some neighborhoods have seen significantly higher appreciation.

Real estate is a sound investment, if brought with sense, and held for a good period of time.

 

Considering our rapid price growth in the last few years, it was only logical to ensure buyers are purchasing homes they can afford in an extenuating circumstance. But the changes are going to increase demand in the lower price cohort, and that demand will runoff and benefit prices in the suburbs too. In a strong seller’s market, where buyers are confused whether to purchase or rent, it’s important to think of your long-term goals. When considering a major life purchase like a home, people turn to company they can trust. They look for values congruent like their own, like integtiy and honesty. We strive to be that team that people look to when they are looking for honest and clear advice.