Canada's Condominium Magazine
The day after TD Economics released a report in which it forecasts fairly modest long-term rates of return on Canadian real estate, a story appeared in the Toronto Star about a “frenzy” around a fixer-upper in the Junction. The Star reports that the house has a leaky roof and needs major renovations, yet it has attracted nearly three hundred potential buyers. The fact that the house, listed for $419,900, needs $200,000 in work has not deterred buyers. Bids will be accepted next Monday.
You can’t generalize about the housing market from a single house, of course, but this Junction property certainly highlights the problem of under supply in the single-family home category. And shows that, as with politics, all real estate is local. Without knowing the details, it’s safe to assume that the house will go for more than the asking price, which one realtor says is low. The seller will no doubt realize a more than “modest” return on his or her investment.
But buying a home is not just about investing. Whether the particular market a would-be buyer finds himself in is “cooling” or heating up, that buyer has to decide for himself whether to go ahead and jump in or wait it out. The decision should be based on more than gut feeling, though gut feeling has its place in the process. The main thing is, you have to be ready to commit, psychologically as well as financially. Like marriage, homeownership is not for the faint hearted.
As housing guru and best-selling author Bob Schultz says, the one thing you do not want to be when entering the housing market is “confused.” Those who are confused, as can be easily shown, tend to make bad decisions, whatever they are doing.
Buying in today’s market
Anyone who is considering buying in today’s market (which in Toronto is still considered a balanced market) with the intention of living in the home for a number of years (five at least), should proceed without undue concern about short-term fluctuations in the market and rates of return. You can’t predict any of that. No one can with certainty (unless the market is in a state of collapse, as happened in certain US markets post-2007). Nor can you control the government’s or the Bank of Canada’s policies regarding interest rates.
The things that you can control can be summed up in certain fixed principles that have guided real estate buyers for generations. These principles are as valid today as they were when our parents and grandparents scraped together a down payment on a home that might have cost, depending how far back you want to go, $4,000 or $5,000.
The first principle from which all others flow is:
Buy only what you can afford
Set a budget and be strict about it. A useful rule of thumb says that each additional $10,000 on the purchase price of a home adds about $40 to your monthly payments (mortgage, taxes, utilities, condo fees). That may not sound like a lot, but if you don’t have it, it’s a lot. Be prudent. Keep in mind that your income could go down, or your monthly expenses go up. Leave room to manoeuver.
Take care of your credit rating
Having determined what you can afford, get your finances in order with the focus sharply on your real estate intentions. Don’t load up your credit cards, or take out a personal loan for some other reason, or buy a new car. Pay off outstanding balances and be sure you don’t miss any payments. You want your credit picture to be as pretty and clean as possible when you walk into that mortgage officer’s office and ask for money. Remember, you won’t qualify for a mortgage if your total debt-to-income ratio is above 32 per cent.
Build up a good down payment
Save up the biggest down payment you can. You can buy a home with just 5 per cent down, but you’ll pay a higher premium on your mortgage insurance, and your monthly mortgage payments will obviously be higher too. The more you put down, the lower your payments will be, and the sooner you will build equity in your home.
As is evident from the above, buying a home is a matter of financial planning. In the absence of windfalls like inheritance money or lottery winnings, you’re on your own. It’s a matter of setting a goal and doing what is necessary to make it happen.