I want to buy a home at the right time, and honestly, who doesn’t? As someone who is continuously browsing listings and daydreaming about which IKEA couch would fit best in my imaginary new living room, there are questions I’ve asked myself many, many times, like how can I score the lowest price possible? Will the market be good when I plan to buy?
Right now, my plan is to buy a home in Calgary, Alta. in 2020; but given all of the articles I read say 2019 is the best year to buy a home, next year might not be the perfect time to buy.
In theory, the best time to buy a home is when you have a sound financial plan and the stars align — but is that possible? Let’s find out.
Find out what type of market you plan to buy in
There are three types of real estate markets that operate in a cycle. Right now, the general Canadian housing market is mostly in a balanced market — which means that between 40% to 60% of homes actively listed on the market sell within a specific time frame, usually 30 days.
If not in a balanced market, only four major Canadian markets — London, Ottawa, Hamilton and Montreal — are in a seller’s market. In these cities, over 60% of houses have sold within 30 days.
The rest of Canada is lucky because these real estate markets are in a buyer’s market, less than 40% of homes sell, which means there is much more supply than demand. This is the primary reason why analysts are touting that 2019 might be the perfect year for you to buy a home.
Buyers tend to wait for homes to decrease to their lowest possible price, but this isn’t always an option. “The only way to find out when you’re at the lowest price is when the prices start to rise again,” says Ron Roy, an Alberta-based real estate broker for Zolo. “There is no way to say the market price of this house is $480,000, and it’s not going any lower than that.”
Rather than play a guessing game, let’s look at non-speculative factors that can guide your decision to buy in 2019:
Interest rates are at historic lows
Have you ever wondered how important interest rates are? Same. Turns out they matter a lot. Interest rates impact the size of the mortgage you can qualify for and how much it will cost to borrow that money.
To get the best rate, you need a solid credit score of 720 or above, a provable income and an income-to-debt ratio of no more than 44% of your gross monthly income. Mortgage terms vary anywhere from six months to 10 years — or longer — with a five-year fixed mortgage rate being the most popular term in Canada.
Reasons for this mortgage rate being the most popular can get complicated, but it has to do with the five-year rate historically offering the best value between security and cost — or how long you can lock-in a good rate and guarantee that your payments won’t increase during that time.
Economists had an inkling that 2019 would be the year for mortgage rates to drop due to a slow global economy. Robert McLister, the founder of mortgage rates consolidator site RateSpy.com, says your energies are better spent determining the best term and then finding the lowest possible rate for the features and service you need.
Don’t forget that terms dictate the rules of your mortgage, whereas rates determine your monthly and overall costs to borrow. Both are important.
What we do know, according to McLister, is that right now interest rates are down-trending. That’s good. However, there’s no way to know if they’ll keep trending down. For that reason, the market is responding.
“We’re seeing increased interest in 10 year fixed rates these days,” said McLister mainly prompted by the competitive move on May 18th, when HSBC bank lowered their 10-year fixed rate to a historic low of 2.94%. This made the typical 2.74% five-year fixed rate, offered by competing lenders, far less appealing.
The lending market is pricing in an economic slowdown, explains McLister. Lenders realize that their mortgage business is about to decrease in volume, so they’re trying to get as many clients as possible locked-in — but competition now doesn’t mean rates can’t drop again in the future.
For first-time homebuyers, like you and I, a good tip to secure a home at the best possible time is to lock in a mortgage rate that will keep our finances on the right path. Why? Assuming you have a mortgage with a 25-year amortization, for every 100 basis points (that’s 0.1%) that rate increases, you’ll pay about $470 more in interest over five years on every $100,000 of that mortgage. For a more in-depth look at how rising rates impact home affordability, check out our analysis here. Locking in when interest rates are low can save you a lot of money long term.
The housing market is far more stable thanks to government regulation changes
It’s not uncommon to attempt to predict the best time to buy a home, but don’t confuse market analysis with market timing — one is an attempt to assess a situation the other is speculation. We all know how well speculation works in the investment world.
The national Canadian housing market has gone through some significant changes as of late. An increase in government regulation, including the foreign buyer’s tax and the mortgage stress test has certainly helped to slow down and level out even the hottest markets.
For example the introduction of the Ontario Non-Resident Speculation Tax (NRST) in April 2017, when foreign home buyers were charged an additional 15% on purchase or acquisition of residential properties in the Greater Golden Horseshoe Region.
Shortly after this tax was introduced, foreign buying dropped significantly. Non-resident buyers only accounted for 7.2% of sales in May 2017 and this continued to drop to 5.6% by the end of August 2017. The Ontario government has seen evidence that more people are able to find affordable homes, in large part due to this regulation change.
“All of those regulations, plus higher interest rates have slowed the housing market down quite significantly,” explains Benjamin Reitzes, BMO Director of Canadian Rates & Macro Strategist.
These new government regulations have shown great effort to level out the market, whether it was speculatory or not. “That’s something they’ve taken care of,” says Reitzes.
There is more to buying a home than numbers
Bottom line: you should never buy a home based on what you think prices might be like in a few years. That investment strategy is called speculation. “Unless you’re a well-capitalized expert real estate investor, buy real estate for the long-term hold,” says McLister.
Holding an asset for the long-term allows you to go through market fluctuations and, eventually, capitalize on the gradual appreciation that your asset will experience. Anything more than that is just luck — which I’ll cross my fingers I have.
With all of this information, you are probably curious as to why I wouldn’t just buy a home in 2019? My answer to that is simple: there is more to a home buying decision than pure math. I’m not buying a home in 2019 because of life circumstances. I have a strict timeline and I don’t have the flexibility to move my buying decision up. Even if all the economists, analysts and my own math tell me that 2019 is the year to buy, I’m not worried, because I’m not buying a home purely as an investment.
Our decision to buy a home is based on finances but also to move closer to our families as we now have a child — did I forget to mention I became a mom just over a year ago?! What this also means is that buying a home goes way beyond the mathematical formula of good and bad investment options. For these reasons, it’s never a bad time to buy a home. There are just less than ideal ways of making this decision happen.
Ideally, when we go to buy a home in 2020, we will still be in a buyer’s market and interest rates will still be at historic lows. But that may not be the case.
Still, with these tips I know I’ll be buying with the best possible knowledge of the market. I’ll truly be making an informed buying decision — and that is the basic building block of a sound financial decision.