This May Be An “Interesting” Year in Real Estate

I am fiscally conservative by nature and if I were looking to buy a house today, I would be sweating it.

It boggles my mind when I hear that people cut it so close that even a 1% increase in their interest rate would put them over the edge. And yet, many of these same people will not lock in to a longer term rate while the rates are rock bottom, i.e., now.

How do they sleep at night?

It was reported on the news that people are now paying over five times their gross salary for a home when the historical average has been 3.5 times. When I bought my place 16 years ago, I paid well over seven times my salary and just under 10% interest. The bank made me jump through a few hoops to get a mortgage but they gave it to me.

Even though it is often suggested that one commit no more than 30% of one’s gross income to mortgage payments, I often threw in almost everything I had left over each month so the actual payments were closer to 50%. I was intimidated and a little scared of debt back then, especially non-deductable debt, so I made it my mission to burn my mortgage as fast as possible.

I make a little more than I did back then (sadly not that much more) but if I were buying my first home today, I would have a very difficult time getting a mortgage for anything other than a studio (maybe).

And now we have the new federal edicts coming into effect April 19th that will make things just a little bit harder- especially for the first time home buyer.

So why the rush to buy now?

Fear.

In Ontario, the HST comes into effect July 1st and will affect all houses over $400000- which is almost every house in the GTA. That is a big chunk of change.

Interest rates have been sitting at an historic low for quite a while and everyone anticipates that this will change soon. Good money expects the rates to start rising by the fourth quarter.

And the new mortgage rules being cast down from Parliament Hill to prevent people from using their homes as ATMs will likely push a few more people into the market who may have been sitting on the fence.

So what do you do?

I’m not a financial advisor and I don’t know you but that really depends on your situation. Regardless of your situation, the first thing I would ensure is that I had enough money to cover at least six months expenses. How much you want to set aside depends on your comfort level. If things are really uncertain, I like to have enough to cover a year of expenses- just in case.

If you are looking to buy a property as an investment (you are not going to live there), it is likely not a great time because the feeding frenzy is pushing prices very high. The higher the price, the more difficult it will be to make a profit. Contrary to popular belief (wishes), real estate doesn’t always go up. Over the very long run, yes but real estate is cyclical and if you buy at the top, the price could conceivably fall for the next 8-10 years before it ticks up again. But the decision to buy or not buy also depends on the property itself, the local market, other developments in the area etc. If you can get decent rents- if a steady income is the goal and not “flipping” the property- that would tip me towards the buy side.

If you only have a small down payment, it may be prudent to wait. A larger down payment will lower the insurance costs imposed by the CMHC. By that point, the housing market may have cooled so even if the interest rates have climbed a few points, a lower purchase price and a bigger down payment may actually work in your favour. Run the numbers and see what you get.

If you find the perfect house, the house that (as a friend put it) you will die in- you may want to take that leap. You are not looking at it as an investment and the house one lives in shouldn’t really be considered an “investment” per se but rather as an inflation hedge or savings vehicle. I have a house (two actually) that got away (though not for the lack of trying) and there is nothing worse than the “what if.”

I try to keep my eyes open for opportunities but everything is too rich for my blood right now. I am thinking of going in the opposite direction and put up my place for sale, lock in the gains and wait out the market. I’ve also advised my sister (who has finally seen the light) to wait it out a bit. She’s not in a hurry so I hope she takes my (humble) advise.

There is risk with every decision but ultimately you have to do what you are comfortable with. Part of my decision making process is asking myself if I be able to sleep.

Whatever you decide to do (or not do), will you?

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~ by angryegg on February 19, 2010.

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