Are Canadian Homeowners Overconfident?

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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.

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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.

Comments

  1. Hmmm … I don’t know much about the housing market but I would think that looking at the purchase plans of existing home owners to be relatively poor indicator for over confidence. I’m sure there’s a correlation there, but there must be better indicators than that aren’t there?

    I would think that most existing home owners looking to purchase would be looking to either upgrade or move to a new location. In the case of upgrading, I don’t think rising prices help existing home owners that much because chances are the cost of more expensive house will rise faster than the price of their existing house and therefore the longer they wait to buy the more it will cost them in a bull housing market.

    However, if prices were dropping, I think that would be the ideal time to upgrade because the more expensive house should theoretically drop faster in straight dollar terms that the existing house that they own.

    Thoughts?
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  2. A dip in volume is usually the first sign of an impending dip in prices.

    Everybody is always overconfident. It’s just the way things are!
    Financial Samurai recently posted..When Is The Best Time Of The Month Or Year To Refinance A Mortgage?My Profile

  3. Agreed – very important to understand how much you can truly afford, and also do scenarios where your rate goes up – can you still afford it then?
    Cat recently posted..Why it’s very important to factor in long term costs for a houseMy Profile

  4. Yay, go Calgary. It’s important not to stretch yourself too thin and understand the risk of future rate hikes. I think some people are overconfident about their local market but overall Canadians have realistic expectations when it comes to the future of housing. I think confidence has to do with economic activity. It’s hard to book hotels in Alberta and Saskatchewan these days because they are really busy with so many people going there, not just from other places in Canada but from Germany, the US, and Asian countries. I think Vancouver and Toronto real estate prices aren’t going up any time soon but Calgary, Edmonton, and other cities in the prairies will continue to see increasing demand and higher prices for the next couple of years :0)
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  5. Great final point about understanding your budget and its limits. I could not agree more. Too often people don’t do their due diligence and end up in trouble because of it. I agree that planning and education breed true confidence, regardless of what the market’s doing.
    John S @ Frugal Rules recently posted..You Won’t Reach Retirement Without Saving for ItMy Profile

  6. Young Families with student loans, car loans and consumer debt are struggling to get a job let alone a home. When they do get into a home and are mortgaged to the top they want to add kids to the mix and it gets worse and worse. Buying a home is a huge investment that can make or break finances if they are not prepared. Like Cat (Canuck Buck) mentions, set up different budgets and scenarios and know what you can and can’t afford. Think of everything you can and do your research. Will you survive if the rates go up? If one simply can’t afford a mortgage with potential rate increases, whilst paying to maintain a home, don’t bother wasting your money and time. There’s more to a home than a mortgage.. some people forget that. Excellent post… shared it with my FB fans to see what their response is. Cheers Eddie. Mr.CBB
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    • I totally agree with you, Mr. CBB; there is so much more to a house than just the mortgage. We are fortunate to be in a newer construction home and shouldn’t have to deal with repairs such as replacing a roof, windows, or septic system anytime soon, but I am very concerned that the mortgage rates will be significantly higher when it is time to renew our mortgage in two years time. We are stretched to the limit financially and are currently under a government wage freeze so I don’t anticipate much if anything in the way of wage increases during that time. Gas, electric, and food prices continue to rise so it is a frightening to think of an increased mortgage payment as well. I tried to express my concerns on this to both to our real estate agent and my other half during the time we were shopping for a home. My concerns fell on deaf ears so hopefully I can get my own finances in better shape in the next two years so that I will have more $$ to contribute to the monthly mortgage.

  7. It all depends on the basis of the confidence. We are confident but based on what? If our confidence comes from knowledge and education then it is a solid confidence but if it based on what we hear in media then it can very well be baseless.