The Canadian Mortgage Trends blog reports on how tougher mortgage borrowing rules have raised demand for rental housing and, in turn, pushed up rents. In fact, rents are rising faster than house prices in Toronto.
Buy or Rent? BMO Economics Says Canadian Home Prices Are Not Highly Overvalued
When debating renting versus buying, BMO Economics studied two scenarios in the Toronto market: A condo with a five-year horizon, and a detached home with a 15-year horizon
A new report from BMO Economics release today challenged the notion that Canadian home prices are highly overvalued versus the price of renting a home.
Recently a report from the Organization for Economic Co-operation and Development (OECD) claimed that Canadian home prices are 64 per cent overvalued. This has fuelled more debate over Canadian house prices, with much attention focusing on ownership versus renting, and whether or not someone in today’s market should opt to rent instead of buy.
“We can confidently dispel the notion that Canadian home prices are egregiously overvalued versus rents, but they’re not cheap either,” said Robert Kavcic, Senior Economist, BMO Capital Markets. “Renting a Toronto condo is a wise alternative to buying for those with a shorter time horizon. However, young families with a longer time horizon in the detached market should not be deterred from buying, but also shouldn’t expect wealth gains like those of the past decade.”
The report noted that on a national basis, ownership currently looks only moderately expensive versus renting. Using current market mortgage rates – around 3 per cent for a five-year fixed rate instead of posted rates – leaves valuations almost bang on their long-run norm.
Mr. Kavcic noted that there are regional differences within the numbers:
- On the west coast, Vancouver valuations have begun to compress from very elevated levels, though ownership still remains expensive versus renting.
- In Calgary, both housing prices and rent prices are rising, so the gap is stable. Calgary’s market looks pricey, but well below levels seen at the height of the energy boom, and resurgent rent growth has helped offset recent price gains.
- Toronto appears only slightly overvalued compared to historical norms, but not at all at prevailing 3 per cent mortgage rates. Notably, the city is miles away from the severe bubble conditions seen in the late 1980s.
When considering the question of renting versus buying, BMO Economics looked at two scenarios in the Toronto market: a condo with a five-year horizon, and a detached home with a 15-year horizon.
The Short Term
“With a raft of completions potentially hitting the resale market in the coming years and interest rates expected to grind higher, Toronto condos will have to defy some stiff headwinds,” noted Mr. Kavcic. “While we would downplay the bubble talk, the risk of buying for a five-year period probably outweighs the potential reward given current market conditions.”
The Long Run
For detached houses with a 15-year horizon, current valuations don’t appear to be a major deterrent to buying for the long run. “The practical limitations of moving a family among – or even finding – detached properties, associated moving costs every few years, and the likelihood of not actually selling after 15 years – given significant closing costs and mortgage payments stopping after 25 years – all add to the case for buying,” said Mr. Kavcic.
“The decision to rent or buy is a very personal one and is determined by a variety of factors that need to be carefully weighed before taking the next step – whether for the short or long term,” said Laura Parsons, Mortgage Expert, BMO Bank of Montreal. “A mortgage for some can be seen as a type of savings plan, particularly if they view their home as a financial nest egg for their retirement years, as many Canadians do.”
Ms. Parsons noted that those who choose renting over owning property should consider working closely with a Mortgage Specialist to build a more aggressive long term saving and investment plan, as they will not be able to rely on the value of a property to bolster their retirement savings down the road.
To buy or to keep renting? Costs go beyond just the mortgage payments
There are many factors to consider when trying to determine whether it’s time to buy a place of your own.
My landlord’s email twisted my stomach into knots.
She informed me that she plans to sell the bright, spacious, perfectly located condo that I’d been renting for the past year and a half.
I would have to leave in three months, she said.
Once the initial shock wore off, I asked myself: “Is it time for me to finally grow up and buy place of my own?”
Farhaneh Haque, director of mortgage advice at TD Canada Trust, said the first factor to consider is whether or not you can actually afford to buy.
“Really have a good understanding of where you stand financially today,” she said.
That means finding out whether there’s enough money for a down payment — a minimum of five per cent of the home’s purchase price. It’s also important to look at what other debts you owe and how stable your employment is.
And the down payment is just one cost to consider. Haque recommends potential home buyers set aside another 1.5 to three per cent of the purchase price to take care of closing costs.
Once the papers have been signed and the property is yours, it’s not just the mortgage payments that you have to worry about after that.
Can you afford property taxes, condo fees, heat, electricity and repairs?
“When you own a home, you can’t call the landlord. Guess what? You’re the landlord,” said Haque.
“You have to create a cushion in your monthly budget to provide for these additional costs.”
Shannen Lazorko, a home financing adviser at Scotiabank, said those costs should be put into the context of the benefits of owning a property.
“At the end of the day, if you continue renting, you’re building someone else’s future,” she said.
Sometimes it does make sense to rent if you’re moving around frequently for work or if the money simply isn’t there.
“I would say, yes definitely it would make sense to rent, but always with the plan to build toward home ownership,” Lazorko said.
“Long term renting to me does not make any sense if you can build towards owning something.”
Steve van der Woerd has a different perspective. He ditched home ownership in favour of renting two years ago — more for lifestyle reasons than financial.
For five years, he owned a condo in Burnaby, B.C.
“There, I was able to get 1,200 square feet, a nice big deck — something I just couldn’t have found in the city of Vancouver for that price.”
But van der Woerd found he didn’t like feeling so disconnected from the cultural and social life in the city. He didn’t like the car-centric way of life and the chores associated with keeping up the condo.
Now, van der Woerd rents in the Vancouver’s South Granville neighbourhood, not far from downtown. He spends less time in his car and has considerably less stress.
“If you’re in Vancouver and you’re thinking of buying, inevitably you’re going to move into a less desirable area unless you’ve got lots of money. My advice would be don’t do that to yourself.”
As for me, I have enough saved for a down payment and the bank pre-approved me for a mortgage at a great interest rate.
But in the end, I decided to keep renting a little longer and build up more of a financial cushion.
When the adviser at my bank plugged the mortgage payments and the extra costs into a calculator, it added up to half my monthly income. That would mean less money for travel, lift tickets and nights out with friends — not to mention emergencies.
“That’s what’s called being house poor,” the adviser said with a laugh.
Read more: http://www.vancouversun.com
Answer: There has been on and off speculation for some time that the hot Toronto condo market is bound for a slowdown. But reports on the future of the real estate market always differ. On one hand, you have some media reporting doom-and-gloom scenarios while others remain optimistic about future growth in the condo sector.
Markets do fluctuate and nobody knows when peaks or valleys will begin or end. The one thing that’s certain is that the Toronto market has continuously taken hits and bounced back over time.
But if you are in the market for a new condo, you have to ask yourself a simple question: “Why exactly am I buying?”
Whether you’re looking to buy a place you plan on living in for a number of years, or to rent out as an investment property, the market will likely fluctuate up and down throughout the time you own it. You can’t control that, and there are no guarantees, but over time you should realize value.
Sure, the market may bottom out in a month or six. You will still have likely gained some equity, and you can expect to see significant growth in the long term based on past trends.
Look at all the major financial market indices. The Dow Jones and S&P 500 have taken major hits in bad markets, yet people who held their positions are better off than they were before markets crashed, corrected, declined or whatever you want to call it. But that underlines there are many options for where you put your money – real estate, the markets, precious metals, under your bed…
It all boils down to opportunity cost – the cost of NOT making the investment in real estate or another asset. That is something I cannot answer for you; your choice as to the best place to put your money for growth requires some soul-searching on your part. It’s not surprising that I would encourage investment in real estate, but I find an asset you or a tenant can live in beats one that’s on paper. Everyone needs a roof!
Let’s get down to brass tacks and look at some numbers relating to the Toronto market.
In Toronto, resale condo units were down 16.9% in the first quarter of 2013 versus the same period last year. Prices were relatively flat year-over-year (0.5% decrease), with the average condo price hovering around the $333,000 mark in Q1 2013 (Source: TREB Condo Market Report Q1 2013).
New condominium completions were in a steady decline for the majority of 2012. However, in 2013 they’ve resumed an upward trajectory. Canadian Housing and Mortgage Corporation (CMHC) is estimating approximately 17,000 new condo units in 2013, compared with 11,000 last year. That’s a lot of condos coming on stream, but many are destined to be bought by investors and enter the rental market where, according to a report this week by Toronto-based condo research firm Urbanation, average rents have hit a record $1,856 a month.
So, active listings will likely remain high compared to previous years. No one can predict what that will mean for prices, but you will have a broad choice and can expect some competition in cost and the ability to negotiate.
Everything still boils down to that basic question: “Why am I buying?”
If you are moving for personal reasons such as quality of life improvement, you may not want to wait. If you are an investor looking to acquire a rental property, then urgency may not be a factor – there is clearly choice and opportunity. That said, waiting would also be a delay in your opportunity for monthly rental cash flow and a start to building equity with your newly acquired asset.
As always, the marketplace is never the over-riding factor – your choice must be based on what works for your own housing and financial needs.
Ricky Chadha is a broker with Royal LePage Estate Realty in Toronto, and specializes in applying social media and other digital tools to the business of real estate. You can find Ricky on Twitter @your416 or at his website RickyChadha.com.