Plunging real estate values are allowing many Canadian renters to breathe a big fat sigh of relief. That’s because, prior to the recent price collapse triggered by the U.S. sub-prime crisis, those who had hoped to buy at some point in their lives were forced to sit on the sidelines, agonizing, as their dreams of home ownership seemingly evaporated in the face of skyrocketing home values.
Not anymore. Real estate prices are down across the country and interest rates are at an all-time low. So is now the time to buy?
It depends on your situation, says Randy Coutts, credit manager for Calgary’s Bridgewater Bank. First, he says, “renting offers advantages, including a great deal of flexibility. If you’re not sure you’ll be living in a particular city for any length of time, for example, then you don’t have to worry about fluctuations in the real estate market or the headaches and costs of selling.” And renting is a lot less expensive than being a homeowner. Renters don’t have to come up with down payments (a minimum five per cent these days), insurance costs are lower due to insuring contents-only as opposed to contents and structure, and there are no property taxes or maintenance costs. Plus, with fewer homes now selling, an increasing number of properties already on the market are likely to wind up offered as rentals – driving rental suite availability up and prices down.
However, there has been – and always will be – one big knock when it comes to renting. The money paid in rent is gone forever. Owning a home, on the other hand, allows buyers to build equity and enjoy a place they can call their own while remodelling it to suit personal preferences. And while home prices may now be on the way down, in the long term, says Coutts, real estate has proven to be a good investment. The economy may be reeling at the moment, he notes, but eventually it will recover. When it does, home prices will stabilize and the price pendulum will start swinging the other way again.
Five Tips for Buyers
You’re a first-time buyer ready to take the plunge? Keep in mind:
• On a monthly basis, it typically costs more to buy than rent a home of equal value. In addition to a mortgage, homeowners must factor in property taxes, ongoing maintenance, legal fees (such as closing costs) and higher insurance premiums. And with down payments of less than 20 per cent, mortgage insurance is required.
• It’s important to set aside a nest egg for emergencies – the lack of which is behind many of the foreclosures currently taking place in North America. A temporary loss of income or the need for a new furnace shouldn’t sink the ship.
• Those buying condos also have monthly condo fees to pay. Potentially, monies to cover assess-ments for repairs and upgrades are also needed. Buyers are strongly advised to carefully examine strata council minutes for indications of upcoming expenditures.
• A home inspection is strongly recommended prior to buying; it’s the best $400 a prospective homeowner can ever spend.
• The importance of shopping around for the best mortgage rates and terms. (Obvious, but sometimes overlooked.)
• A final cautionary math note: mortgage sellers frequently use mortgage calculators to illustrate the advantages of buying over renting. But, as noted, such calculations frequently omit many relevant costs – and almost never emphasize the need to have contingency funds set aside for emergencies.
We Canadians are getting used to the media telling us that the sub-prime mortgage issue causing so much havoc south of the border can’t happen here. But is it true? Maybe. Despite the fact that Canadian banks are typically more assiduous at vetting borrowers’ income and asset statements, and the fact that the mortgage default rate in Canada is a manageable 0.33 per cent, declining house prices and mounting job losses could drive this number into the one- to two-per-cent range. “That may not sound like much, but for the banks it would be a concern,” says Bridgewater’s Randy Coutts. As for Canadians, it could lead to increased credit restrictions and a further drop in both consumer spending and house prices.