Forget Burbs—Should Buyers Fly Until They Qualify for a Mortgage?
August 25, 2023 | Posted by: Owl Mortgage.ca
During my time as the resident mortgage expert on CP24’s Hot Property TV show, I started using the phrase “drive until you qualify” to describe the advice given to home buyers struggling to get into hot real estate markets. The idea was that you should expand your search from high-priced urban centres to less-expensive suburbs.
In the years since, property prices have continued to rise to record-breaking highs, leading buyers to drive even further from city cores in search of more affordable homes. But now that even small-town prices are reaching new highs, are hour-long commutes enough? Or should “fly until you qualify” be the new mantra for those looking to get into the enticing world of home ownership?
Have we hit a crisis point in Canadian real estate?
Housing affordability seems to be at a crisis stage for Canadians. Economists and financial analysts warn of the Canadian real estate market’s vulnerability, and everyone seems to have an opinion on who or what is to blame. Many analysts, industry experts and politicians have predicted the timing of the real estate bubble bursting. They have pointed fingers at everything, including foreign buyers, mortgage stress test, rock-bottom interest rates, real estate investors and speculators and more.
Contrary to these experts, I believe the market will find a balance and return to normalcy. The question is, should prospective home buyers migrate to less-expensive parts of the country and adopt the new mantra of “fly until you qualify”? Before I answer that question, let’s look back at the factors that have brought us to where we are today.
A lack of housing supply
The pandemic’s major casualty was long-term care facilities, assisted living communities and retirement residences. As the death toll numbers from COVID-19 rose, many seniors who planned to transition to retirement homes chose to stay put—and not sell their homes.
These seniors opted for other arrangements, such as obtaining a reverse mortgage, refinancing to fund personal care workers or having their children or grandchildren move in with them. Together, these would-have-been sellers represent a huge segment of the real estate supply whose absence has caused a void of properties for sale and put pressure on the market.
On top of that, employment uncertainty during lockdowns, the possibility of new COVID variants and the speed at which prices have appreciated, all have kept many people from moving, which has further contributed to record-low housing supply across the country.
The new-construction industry faced tremendous challenges with supply and skilled-trade shortages, which slowed the roll-out of newly constructed detached homes, townhomes and condos. This delayed the release of new developments that could have increased supply and prolonged the delivery of much-needed units on the market by years.
A huge boost in demand
Those initial months of COVID led to many difficult conversations with home owner clients. I became a kind of grief counselor to those who didn’t know how to make their next mortgage payment after losing their jobs.
Within months, the mood started to change. Canadian savings rates soared from stimulus cheques and rising equity markets. Work-from-home arrangements allowed many to save thousands of dollars in commuting costs. The inability to travel prompted unused vacation budgets and savings from less entertainment and dining out. Bank accounts were getting stuffed with cash, and there was nowhere to spend it. Borrowing rates dropped to record lows, and financing homes was cheaper than paying rent. For the first time in decades, we saw household credit card debt shrink. Surfing the internet for real estate became the new Canadian pastime where home appreciation was adopted as the instant wealth creator.
When you couple the lack of supply with the more than $200 billion sitting in Canadian savings accounts, record-low mortgage rates and an insatiable hunger to enter the real estate market, it fueled and amplified demand.
Many eager parents with padded bank accounts are wanting to assist their children in entering the real estate market. Despite an increase in the stress test qualifying rate from 4.79% to 5.25% in June 2021, parents stepped up to co-sign mortgages so their kids can buy a house and aboard the wealth-building train.
Immigration targets remained at more than 340,000 per year during COVID—and increased to more than 400,000 in 2021. These new permanent residents need homes. Whether they rent or purchase, our system is not designed to have this amount of demand in the marketplace. This imbalance between supply and demand has created record-level property values and has become a national news story.
What does this mean for prospective home buyers?
I believe you won’t need to uproot your life for the sole purpose of becoming a home owner.
Although the Bank of Canada held off increasing its overnight rate at its first meeting of the year in January, there is no question we will be told that the rate will be going up at the March/April meeting. Inflation needs to be contained and brought back to normal levels. Higher rates will help relieve some of the pressure on housing prices.
Plus, as COVID lockdown restrictions ease and employers look to bring workers back to work a few times a week, many people will start to second guess a move to the suburbs. Coupled with promises of new housing—in Ontario, the provincial government announced plans this week to build as many as 1.5 million new homes in the next decade—supply should start to catch up to demand. For these reasons, I believe the Canadian real estate market will level off and achieve a more balanced state.
There’s no denying some would-be buyers will be priced out for the time being, with many maintaining a renter’s life. But if you’re currently renting, it’s not the worst situation to be in. Property appreciation will not continue to follow the trajectory set during the pandemic.
In the meantime, it would be prudent to set personal savings goals and to take advantage of the tools available to accumulate tax-free or tax-deferred savings for your eventual down payment. Make the most of a tax-free savings account (TFSA) or registered retirement savings plan (RRSP). (Which one is better for you?) Through the Home Buyers’ Plan, the latter is a great way to access up to $35,000 in down payment funds per applicant.
In addition, look for ways to cut back on your spending. Whether it’s choosing to go out for dinner one less time per month or reviewing your latest credit card statement for any subscription, membership or recurring monthly charge that you no longer require, these habits can lead to substantial savings. Owning a home isn’t the only way to grow your wealth.
I’m confident that once the worst of COVID is over, and we all get back to a normal way of life, we will see flat real estate values and a more healthy, balanced real estate market. We will go back to telling first-time buyers, “Drive until you qualify.”
To view the article on the Money Sense website, please click the link below.