Spring Markets and Mortgage Rates
Real estate's on fire across Canada. What goes on with spring real estate markets and mortgage rates?
Like almost everywhere, pent-up demand drives Ontario house prices skyward. Motivated home buyers and sellers save up and the time seems right to buy.
Before you jump in or after, if you have questions to ask a real estate lawyer, Axess Law has answers.
What Spring Markets Are Doing Now
Interest rates are at historic lows -- and that means they have nowhere to go but up.
Monthly sales are at all-time highs, climbing by an astounding 76.2% over the same time last year, the Canadian Real Estate Association (CREA) reported in March 2021. Sales listings are up by 50%, 7.5% alone between February and March.
Axess Law says you could buy now and regret it later or sell and pay off debts.
But could you get back in?
What Ontario Homes Cost
Ontario has Canada's second highest housing costs. Average home prices were $675,000 in Ontario and more in the hottest markets ($1.09 million in the GTA). Hamilton-Burlington and
Ottawa are expected to see the greatest gains for luxury home prices. Even average homes in GTA communities could go up by 7% to 10%.
Real estate values have been on the upswing by about 6.11% yearly since 2006. That's not as lucrative as hedge funds or high-flying stocks, but better than Treasury Department bills or Canada Savings Bonds.
Besides, you have to live somewhere.
Buy Low, Sell High
Bidding wars are booming. Could you win big?
Buyers are dropping subject-to conditions and putting in offers sight unseen.
It's hard to see how anyone could ever buy low and sell high these days. Especially in Greater Toronto Area, where house prices are historically high and even a small condo costs a lot.
You could cash in and sell, if you have a market-ready house.
Are you too late already?
Sizing Up Selling Options
If you kept up your home and have only minor touch ups to do, this could be an opportune moment to compare appraised values in your area. You could look at MLS listings, ask realtors or pay for an appraisal.
When major upgrades, like a new roof or foundation repairs, are needed, weigh the cost against potential profits. Get estimates, calculate your timing and decide if you could afford a new home after you deduct expenses. Would you be content to rent and hold if you couldn't buy?
You might list after the pandemic, only to sit on the market with everyone else who held and now wants to sell. Housing starts rarely keep up with demand in highly populated places like Toronto. Your wait may not be long.
Finding Home Buying Bargains
Bargains may still be out there for buyers who know where to shop. Maybe you could score a good deal on an affordable, right-sized property in a smaller place by keeping your expectations in line with your budget.
What Buyers Want
Ratehub.ca predicted last quarter that remote work would lead to demand for larger spaces and hikes of 4% to 7% in home prices. The online mortgage brokerage pinpointed suburbs with large homes, centred around major urban areas like Toronto, as particularly popular. Maybe what you really need is more space to stretch out, like a rambling farmhouse or cottage at the lake.
Is a Condo in Your Future?
An urban commuter like you stuck in the burbs? How about a condo instead? Condos are favoured to decline in popularity until mid-year, mostly because of restrictions on immigration, international students and Airbnb rentals. Cross-border and international travel could stimulate new demand in fall 2021. By then, condos could be the option of choice for buyers armed with First-time Buyer Incentive grants. Getting in early could score you a bargain.
Questions to Ask if Buying
- Is metro Toronto or the GTA where you plan to live, work from home or retire?
- Are you comfortable home hunting during a pandemic?
- Could you outbid competitors if a home you desired came on the market?
- Are you caught up unnecessarily in a buying frenzy?
- If retirement is looming, is congregate housing like long-term care, assisted living or condos with their shared spaces still for you?
New Mortgage Rules for Buyers
Canada's mortgage rules are changing in response to the state of flux. Stress tests used to be just for high ratio mortgages for buyers with down payments lower than 20%. Even conventional mortgage holders with 20% or more down will now require a stress test. An Axess Law mortgage lawyer can explain the change.
The Ontario Superintendent of Financial Institutions (OSFI) has been signalling that it wants tighter controls on uninsured mortgages starting June 1. That's to rein in overleveraged consumers from buying more home than they can afford.
Stress tests make you prove you could still afford your mortgage principal and interest if interest rates went up. New rules apply to home buyers putting 20% or more down, but not renewals at most banks. Mortgage lenders use the Bank of Canada’s five-year benchmark rate or your mortgage interest rate plus 2%, whichever is higher, to calculate your ability to pay.
What's At Stake
Low interest rates can give home buyers an inflated sense of purchasing power. What's affordable during low interest rate periods may exceed what a home buyer can juggle if rates go way up when they renew. Significant walk-aways, foreclosures or distressed property sales can bring down home prices, making property worth less than the mortgage on it.
Bank of Canada Rates Stable
2020 thinking was that the Bank of Canada (BoC) would leave its trend-setting overnight rate, which plunged to 0.25% in early 2020, alone. The BoC rate influences variable-rate mortgages and home equity lines of credit tied to mortgages. They stay stable as long as the BoC rate is flat.
Bonds Could Push Rates Higher
But early economic rebounds may cause government bond yields to rise. And that could push up fixed-rate mortgages this fall. Financial analysts give mortgage interest rates a 60% chance of at least one hike in the next year.
They're pitching for five-year fixed rates to still be the best bet for most home buyers. Even with interest penalties for breaking mortgages early, fixed rates could outdo variable rate savings.
High Debt Loads Worry Feds
With the BoC chiming in that consumers have worrying amounts of "stretched" debt load, it's no wonder the central lender supports the OSFI proposal for more hard controls on traditional mortgages.
Note that the BoC thinks housing demand is outpacing supply. That supports a run on condos when average home buyers run out of other affordable options. The central bank is looking to low ratio mortgage stress tests to put the brakes on.
That might happen in June, when qualifying rates for uninsured mortgages increase to the higher of two percentage points above market interest rates or 5.25 per cent. Qualifying rates have been 4.79 per cent.
GST Housing Rebates Low for GTA
Federal grants like the GST New Housing Rebate won't help much. That program offers rebates of up to $6,300 or 36% of the GST on the purchase price of new build homes used as principal residences. Home buyers tap out at $350,000, hardly enough for a micro suite in some parts of the GTA.
Mortgage lenders were holding their breath that government didn't target capital gains allowances in its spring 2021 budget. It didn't. That's welcome, but the BoC remains concerned home buyers will keep chasing a small number of over-priced housing units.
What Financial Analysts Think About Interest Rates
What's the reaction from other quarters?
- Bank of Montreal thinks the buying frenzy is a sign of things to come in fall. Interest rates traditionally go up to block speculation and pull home prices back down to more realistic levels. Chief economist Doug Porter says the new OSFI June 1 stress test will simply reduce how much buyers can afford, not dampen their enthusiasm.
- Royal Bank of Canada expects buyers to lock in or refinance fixed rate mortgages in anticipation the housing bubble could burst. RBC Senior Economist Robert Hogue says a "soft landing" could be in store for housing prices in 2022.
- Hogue predicts low immigration rates could start to hurt after the market churn caused by buyer's reluctance to house hunt during a pandemic is absorbed. Eroding affordability could put a chill on the housing frenzy, he predicts.
- ReMAX believes housing sales will remain steady in 2021, with demand for more space, larger yards and proximity to amenities like parks.
- York University economics professor George Fallis agrees with that. Logically, housing prices should have risen around 12 per cent in Toronto since 2014, not the over 93% they did. He relates the surge to a housing bubble, not a supply problem.
- Looked at another way, Toronto added 230,210 dwelling units to its housing supply in the past six years. Given its population grew by 556,470 residents, Fallis says the region only required 198,740 new housing units.
All of which makes for interesting, if uncertain times. Be careful if you plan to go in with a firm offer on real estate.
Taxing Foreign Owners
GTA’s housing market is no less frantic for foreign property owners, who are up against a new 1% tax on the market value of vacant or under-used residential properties. The proposed federal speculation tax for non-resident non-Canadians is scheduled to start Jan. 1, 2022. It’s on top of the Ontario foreign buyer tax.
How Speculation Taxes Work
If passed, the Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners will require property owners to file an annual declaration with Canada Revenue Agency from 2023 onward. Canadian citizens and permanent residents are exempt.
Failing to file or pay the tax will trigger penalties, interest and unlimited assessment periods. Owners can avoid speculation taxes by leasing their properties to qualified tenants for at least a calendar year at a time.
What It Means for Owners
That could flood the market with rentals. Frustrating! if you are buying a home for rental income. Increased supply could mean lower rents, but not always. Owners might also dump their properties. That could cool housing prices as buyers have more choice or heat things up if demand stays high and interest rates low.
Where to From Here
Axess Law real estate lawyers can't tell you which way to jump, but we can close your real estate transaction quickly. We refinance mortgages starting at $799.99 when you are up for renewal or chasing a better rate elsewhere. Access legal services when you need a professional to explain real estate law in Ontario or answer questions like if a real estate deal falls through who gets the deposit? We go online or meet you in person, whatever you prefer.
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