As real estate prices surge, you may feel discouraged about getting into the market if you’re a potential first time buyer or you may feel scared attempting to expand your real estate portfolio because the market seems volatile and the future uncertain.
There is no doubt that real estate in Canada's major cities has increased by almost 300 percent since the 1990s, when the last market crash occurred. In the 90's, a few of my friends bought their homes when distressed mortgage holders left their keys on the front porch because they could no longer afford their mortgages. Their properties now have tons of equity, which they used to buy additional rental properties. Needless to say, they are multi millionaires and their retirements are secure!
Owning real estate, however, is not for everyone. Despite the fact that their properties are rented out, some people are not comfortable managing rental properties or being responsible for various mortgages in case of market crashes like the 90s. That’s completely understandable. Just like any other investment, real estate can present risks and so it’s important to balance out those risks and rewards. For your own knowledge, a lot has changed in the banking world since the 90s. There are way more safety mechanisms in place to avoid crashes that happened in the 90s and in 2008, for example.
During my career, I considered renting versus owning. Both sides had their arguments. Renting, for example, does not require you to pay property expenses or maintenance costs. The rent will only increase by about 2 percent per year if you stay in the same place, for instance, and there won't be a need to remortgage every five years. But realistically, with renting, you would have to be able to save enough money each year to beat or match the gains you are making in real estate. On average, real estate increases about 3-5% per year (even with corrections along the way).
So, if you purchase a house for let’s say, $800,000, you can expect your value to increase by up to $40,000 per year. If you manage to save $10,000 a year in personal savings, you will only earn approximately $500. Of course, you can always put your money into riskier investments, but not everyone feels comfortable doing that, and nothing is as stable as a physical, hard asset like real estate. Additionally, with renting, you cannot force savings and your rent doesn’t gain you any equity. When you have a mortgage, you’re paying down principal and interest which frees up your equity that you can potentially use in the future.
To put it in perspective, the property owner who purchased a home for $800,000 will have earned approximately $200,000 in five years, and the person renting and putting money away will have only earned $2,500-$5,000. This is exactly why 75% of Canadians have their wealth in real estate, and why many renters complain they can’t get ahead.
Now, I know what you are thinking. The market has decreased in value! Well, you are right and wrong at the same time. During the last three years, the real estate market experienced exponential gains because of record-low interest rates. These low rates brought everyone and their mother out of risk-aversion and propelled them to buy real estate. A million dollar mortgage for five years only cost about $3,400 per month and was outperforming rent! It made sense to buy, and as a result, we had huge demand! Some properties increased by 50 percent!
The correction we are seeing now is merely the scaling back of the pandemic gains, but property value in cities like Toronto and Vancouver are still up 14-20 percent, and it’s unlikely that this will change anytime soon.
Just consider immigration. Our government has plans to bring in 100 million people by the year 2100. That’s 500,000 immigrants a year. Toronto’s population is going to go from 3.3 Million people to 33 Million people. And during this time, people will need shelter, which will put more demand on the housing sector, pushing up property value. Ontario only builds about 70,000 houses a year, so the math on supply/demand isn’t hard!
Not to mention that it is getting harder and harder to qualify for mortgage financing!
In addition to being stress tested, the government now wants to crack down on alternative loans and make sure even those who need unconventional financing pass certain tests and meet stricter qualifying criteria. This is simply going to create a larger divide between property owners and renters, but make no mistake, there will be many more renters, and this is why investment companies are purchasing neighborhoods at a time. These companies understand the future landscape of our countries and cities, and they are capitalizing on the prices now.
So, the point of this post is to really think about your equity you have now or even getting into the market while you can, and of course, working with a knowledgeable mortgage professional;)
I have been in the real estate and mortgage industry for over 20 years! I am very experienced in mortgage loans, and have been rated the best by “threebestrated.com” which actually checks my reviews on the web. It is my job to not just complete a mortgage for you, but also help you understand the process and become your personal mortgage guide. I recognize that sometimes, people need more than just a person behind a desk. They need someone to confide in and trust and look out for their best interests. I will do just that!
If you would like to set up a consultation, please feel free to call 647-773-4849 or email me at firstname.lastname@example.org. You can also visit my website at www.coluccimortgages.com
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While many homeowners' monthly mortgage payments on adjustable-rate mortgages and lines of credit are increasing by hundreds of dollars per month, some industry analysts think that time is running out on interest rate increases.
With rampant inflation and higher rates bleeding through to 2023, it is expected that variable-rate and fixed-rate mortgages will continue to remain unattractive in the short term.
BCREA believes that five-year fixed rates have already peaked at the current 5.5 percent average, and that rates are expected to start falling early in 2023, ending at 5.05 percent at the tail-end of 2023. Mortgage rates are expected to increase through 2023, but they are equally likely to start falling if the Bank of Canada (BoC) hits their inflation targets earlier.
CIBC analysts project that the Bank of Canada will keep rates at the higher levels through 2023, slowing demand and allowing inflation to hit its 2 per cent target.
Looking forward at the end of 2023 and through 2024, analysts are penciling in an early rate cut from the Bank of Canada, which could bring national benchmark prices back below the 3.00% mark before 2024. If the bond markets predictions are right, though, our central bank would be signalling a rate cut before year-end 2023.
The Bank of Canada is expected to start cutting its policy rate in response to significant economic slowdowns or a recession, beginning in the second half of 2023. The BoC has also said that it will hold off on cutting its overnight rate until Canada's economy has recovered and inflation has reached about 2%.
Long-term rates could reach lower levels by late 2023 in both Canada and the United States, because markets are starting to price in modest central bank policy rate cuts for 2024, and forecasting inflation will stabilize and decrease.
Currently, the Canadian 5-year bond yield is priced to expect another 0.75 percent hike by the Bank of Canadas interest rates in early 2023. That means that some homeowners, who are seeing a big jump in mortgage payments, may have to either refinance their homes or list them for sale. It can take 1-2 years for inflation to tame, according to BoC, so holding onto a short-term fixed-rate mortgage might be a good bet, but you might then end up having to re-lock in as rates will not be at their lowest.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929