The prime interest rate that banks can borrow from the Central Bank still sits at 1%. Mortgage rates are generally pegged to bond rates, but the overall economic sentiment around borrowing impacts what consumer pay for their home borrowing. The Investor’s Group rolled out another attempt at 1.99% variable 3 year mortgage in early May. Who can qualify depends on a number of factors, having CMHC insurance is usually a pre requisite to cover any possibility of loss for the lender. Overall, what does this mean for the economy in Canada?
There are signs of overall economic strength, but also stagnation. The recent figures on the job market saw a increase in unemployment. That doesn’t stop many from jumping into the market for record setting interest rates. Money is cheap and those who want a home won’t pay any less in interest payments than they can now. But that’s also the risk. At 1.99% you can’t go ANY lower, and everyone expects rates to increase, and perhaps jump in the short term. But we’ve been hearing this kind of talk for years now, talk of increasing interest rates, talks of housing bubbles, yet nothing has happened as of yet.
It’s true, interest rates WILL increase eventually, and variable mortgage holders will be the first to feel the affects. That means if you can barely scrape by with your current housing selection, then consider downsizing your expectations and take on less debt. But it’s not just borrowers that need to pay attention to the market trends.
Realtors have skyrocketed. Those looking to take the test are showing up in droves. The money for hot markets is enough pull to attract new Realtors. Think about the commission on homes at 3/4 a million. Sell one a month and you’re laughing. More, and you’re rolling in the dough. But of course, you have to sell first.
If you’re a builder the excitement of meeting demand continues to torrid pace of expansion. Many cities are facing a push to forget about policies that would limit urban sprawl. In the inner-cities, small builders are facing the oppsite problem. With the prospect of appreciating home values, everyone with cash are thinking about making a quick buck. The only problem? The margins with building luxury buildings is hardly worth the time given the cost of building in hot markets. Unless you’re a big builder with cost cutting measures, your margins may be very thin. Think about it, just to start off in some areas you’re going to need 500K in land value alone. Another 400-500K to build each, and you hope to sell two lots at .750-1 million netting at best .5 million or at worse near loss.
If you’re a buyer things couldn’t be worse. The money is great in hot markets, assuming you have a fantastic job. The single family home dwelling is cresting 400K in most markets in Canada. This is pushing families to low income or new suburban developments. Selling is great, if you’re downsizing, but the market continues to outpace previous years, so unless you’re selling in Calgary and moving to Halifax, you’re not coming out ahead.
If you’re first time buyer you take advantage of great interest rates but you have to saddle a significant mortgage for a very long time. 200K a month for 30 years? That’s a lot of money going to the bank.
If you’re a buyer looking at an investment simply for rental income and the hope of cashing in your equity later in life you might be in for a surprise. Cash flow is negligible, perhaps even a loss, which means in order to get into the market (let’s say 10% down on a suited home that will cost 500K at best) for 50K, would that money be better off in equities for 30 years or in a house that will appreciate, but by how much (not including all the risk associated with renters).
Easy math would pit the 50K today invested in equities over the 30 year span to come out ahead every time.
Where do you go from here? The reality of current housing market condition are such they aren’t going down. Yes, always a discussion about a potential bubble, but our current climate only sees marginal increases in the housing sector.
If you’re priced out of the single family dwelling market then many look to condos. Calgary’s condo market hasn’t reached a bubble scenario like the trouble in Toronto or Vancouver. The issue in the prairie provinces, particularly in oil-rch Alberta and Saskatchewan is demand. This is even more pronounced in Calgary, which leads the nation with year over year growth almost at 10%. The growth explosion continues at a rapid pace in both population and new building, but also includes a diminished supply of homes due to the flood in 2013. Many homes haven’t been rebuilt, but more imortantly, the rental market and supply issues are driving up all prices. There is also talk about restricting urban sprawl in areas like Calgary, that won’t impact the short-term growth, but may curb development in the long term.
Be sure when purchasing that you do your due diligence particularly in flood areas. For all condo sales it’s imperative to go ahead and hire an attorney to review, amongst other things, the condo documents. This will give you an idea if there are problems on the horizon and whether or not the reserve fund for future work and maintenance won’t leave you high and dry. This is an issue to pay attention to especially given the amount of money it takes to get into the market, but also there are individuals who are barely making mortgage payments at the record interest rates. That means they cut corners in places where they shouldn’t, like reviewing condo docs themselves.
With notes from Calgary real estate lawyer Taylor Conway.