The following article is written by Brennan Valenzuela for RateHub.ca, a website dedicated to mortgage rate comparison and education.
Are Canadian homeowners overconfident? According to a recent BMO report revealed that nearly half of current Canadians homeowners (46 per cent) intend to buy a home in the next five years, signalling a high-level of national confidence in the future of the housing market. Strong homeowner confidence in the Canadian real estate market is a bit inconsistent, in light of the most recent housing data from the Canadian Real Estate Association show that national home sales are down 15.1 per cent, from September 2011 to September 2012. Although the average home price is up slightly by 1.1 per cent, the market remains firmly in balanced territory.
The three most confident cities, according to BMO’s report, are Toronto, Calgary and Vancouver. Of that group, only Calgary can claim they are unaffected by the tumbling real estate drift seen across the nation. “Cowtown” led the country with the highest annual growth rate (14.8 per cent) from September 2011, so it is understandable that Calgary homeowners would carry the most purchasing confidence among all Canadian cities.
However, in the two largest real estate markets in Canada, home transactions have taken a significant dip in activity. Residential sales are down 21.0 per cent and 32.5 per cent in September (year-over-year) for Toronto and Vancouver respectively. Both real estate markets show signs of oversupply and a market correction will place downward pressure on home prices.
Confidence in Mortgage Rates
Consumers looking to purchase in the near future are able to increase their affordability by taking advantage of low mortgage rates. For example, let’s assume you were to buy a $300,000 home with a 20 per cent down payment, amortized over 25 years. Your monthly mortgage payment would be $1,128 based on a 5-year fixed rate of 2.94 per cent.
At the end of the 5-year term, your mortgage balance would be $204,902. If during that time interest rates rose two per cent, a new 5-year fixed rate at 4.94 per cent would increase your mortgage payment to $1,340 per month for an increase of $212. However, when compared against the average yearly wage increase in Canada (roughly two-to-three per cent), a two per cent mortgage rate increase isn’t as crushing as it appears.*
Perhaps Canadians are more financially canny than we give credit to. A portion of the BMO survey participants already display budget planning and prioritization with their finances. One-third of homeowners said they cut back on big purchases and entertainment spending to meet their mortgage payments.
National buyer confidence drops significantly from 46 per cent to 36 per cent in the event home prices increase by five per cent. The decline in confidence reveals a level of awareness by Canadian homeowners that they are sensitive to price inclines.
Overall, whether you are entering the real estate market in a buyer’s market versus a seller’s market or mortgage rates are expected to increases, it is imperative to understand your budget and its limits. From finance planning and education comes real confidence – confidence that your finances will remain manageable under any environment.