I don’t wish to sound like a euphoric clown, spouting sunshine-and-rainbows while the rest of the world is focusing on the troubling news of higher inflation and rising mortgage rates, but at the risk of swimming against the current, I wanted to highlight that there are still opportunities. If you’re willing to keep an open mind and consider a different perspective without dismissing it off-hand, please continue to read on…
Carpe Diem – Sort Of
Seize the day… but for a better future (not at the risk of it). What I mean by this is, in my opinion (and it is just an opinion), we’re quickly entering into a (brief) Goldilocks period of time where local property values have receded from their recent record highs (and by quite some margin!) before increasing mortgage rates have caught up. Therefore, there will be this short window of time for buyers where their property-buying dollar will stretch the furthest, giving them the best chance of buying a property most affordably.
Make Sense? No? Let’s Not Lose Sight Of Two Key Elements
First, as mortgage rates continue their aggressive trajectory upwards (to help bring down inflation; that’s a whole other topic…), the cost of borrowing skyrockets disproportionately (and thus makes qualifying for a mortgage that much more difficult). Einstein once called compound interest “the eighth wonder of the world” simply because even the smallest increase multiplied by itself (say, for 25 years) results in a product exponentially higher than most linear minds consider. In fact, he went on to elaborate: “He who understands it, earns it; he who doesn’t, pays for it”. Now, you have no excuse; work to be the former.
Don’t believe me? Just play around with any online mortgage calculator (such as what you might find on my website, for example) and increase the mortgage rate by 0.5% a couple of times to check out how much more payments increase every month (never mind how much you’ll end up paying over the 25-year life of the total mortgage). It’s nuts. Once you’ve done that a couple of times, now keep the interest rate the same but increase the size of the mortgage; how much more do you have to increase that to come up to the same higher monthly payment?! Suddenly, that “small” 0.5% interest rate increase doesn’t seem so puny…
I mention this because it should take only a handful more interest rate increases (which the Bank of Canada seems committed to do), scheduled to happen over the next three to six months, before the higher cost of borrowing more than makes up for lower home prices and the total monthly cost of owning a home won’t be any different than it was when prices were at their highest. It might end up costing more, which only renders the mortgage qualification process that much more difficult. Remember, affordability is always about the total cost (think in monthly terms) rather than simply just the one component of the purchase price alone. Most don’t think about this. After all, affordability is the measure of what it costs to pay for the whole property every month, not just the purchase price: the mortgage, property tax, insurance, hydro, etc.
Second, the fundamental lack of supply hasn’t gone away (rather, it’s been conveniently displaced from the headlines in the news – for now). So, all those buyers who have been waiting on the sidelines for prices to come down are all starting to think the same thing: it’s time to buy! (and especially so before our initial mortgage pre-qualification expires). Best to get into the market before this wave hits. Remember, there are still more people moving to Canada than there are new properties being built (and those being built have much higher construction and labour costs). This is a basic numbers problem, isn’t going away and can’t be solved overnight.
So, all this is to say: If you’ve been waiting to buy for the past couple of years, think seriously about getting into the market now. Here’s your chance and buyers have leverage to negotiate (reasonably) – seize the opportunity. Everything is cyclical. Prices will go up again even if it doesn’t look like it right now and even if it takes two or three years.
… and then you’ll be glad you bought when you did. Always play the long game.