Sun
If you blinked, you might have missed the real estate slump that accompanied the recession of 2009. Home resale prices have recovered most, if not all, of what they lost in the aftermath of the credit crisis and financial meltdown. In fact, the average price in British Columbia was up more than 17 per cent in October to $493,328 from the same month a year ago, while residential sales totalled 8,624 — a 115-per-cent increase from a year earlier.
It was a similar story nationally last month, with average prices in major markets up 22 per cent and resale home sales up 41 per cent.
Reasons for the home-buying boom seem obvious: Low interest rates, mortgage flexibility, rising consumer confidence and pent-up demand. In B.C., which has the highest prices and biggest mortgages, buyers seem more confident than other Canadians that prices will continue to rise.
Even if they are right it would be prudent to remain cautious. The increase in home sales and prices is clearly outpacing the rate of economic recovery. Even the most bullish forecasts put growth of gross domestic product at no more than 3.5 per cent next year and the threat of a double-dip recession has not been ruled out.
Consider also that Canada’s population is growing slowly — by just 0.62 per cent in the first half of 2009 — and that a majority of Canadians already live in homes they own or are owned by household members. According to Statistics Canada, 68.4 per cent of Canadian households own their home, the highest rates since 1971. That means first-time buyers are coming from a dwindling pool of renters, about 31 per cent of households, and homeowners who are upgrading, downsizing or relocating. A high rate of home ownership in an aging, slow-growing population could sooner or later dampen demand.
Perhaps the most significant drivers in residential real estate are interest rates and mortgage terms. Gone are the days when borrowers required a down payment of 25 per cent, amortization of no longer than 25 years and the financial wherewithal to keep carrying costs below 30 per cent of gross income. Today, a buyer can opt for five per cent down (paying a hefty mortgage insurance premium for the privilege) and a 35-year amortization. Nearly half of those who took out mortgages this year chose amortization over 25 years. About one-quarter of households spend more than 30 per cent of their income on shelter. “They may do so by choice,” StatsCan offered by way of analysis, “or they may be at risk of experiencing problems related to housing affordability.”
Low interest rates have been a godsend for mortgage borrowers, and a curse for savers. A variable rate mortgage can be had for 2.25 per cent, and mortgage brokers, who arrange about a third of all new mortgages, claim they can beat that. A typical five-year fix rate is just below six per cent.
But interest rates can change in the blink of an eye. Fixed rates are based on bond yields and are vulnerable to volatility in financial markets. Variable rates reflect prime rates which are subject to the whims of the Bank of Canada. The central bank has pledged to keep its overnight rate at the current 0.25 per cent until July 2010, but an uptick in inflation could force its hand earlier.
Interest rates are expected to increase after that date, assuming the recovery gathers momentum and the consumer price index approaches the central bank’s target of two per cent. Highly-leveraged borrowers may find themselves with larger monthly payments than they can handle.
Home ownership accounts for nearly 40 per cent of Canadians’ wealth, up from just 16.3 per cent 20 years ago. Financial advisers warn that real estate valuations can go down, as well as up, and people should diversify their investment portfolios, especially in retirement when a house should represent no more than 25 per cent to 33 per cent of total wealth.
All that being said, home ownership can be satisfying and financially rewarding. But would-be buyers should enter the market with eyes wide open and view their purchase first as a place to live, and only second as a store of wealth.
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