PETER DOLEZAL: Low interest rates: a support lifeline for real estate

Unit sales to the end of February across all categories of Greater Victoria housing continued to decline

Unit sales to the end of February across all categories of Greater Victoria housing continued to decline — falling some 21 per cent year over year. The drop in prices, though significant, has been more moderate.

Relative to February, 2012, median prices for single family homes declined by 4.7 per cent; condominiums, 2.1 per cent, and; townhomes, 11.6 per cent.  These declines are by no means catastrophic.

Why (so far) have we been spared a more drastic price fall in what is very clearly a buyers’ market? One need look no further than the support provided by the current incredibly low mortgage rates that continue to be available to buyers. Buyers with a good credit rating can now lock-in a five-year fixed-rate mortgage at yet another record-low rate of 2.79 per cent.

On a 25-year amortization, this means today’s qualified borrower would pay only $463 per month for each $100,000 borrowed. With a $250,000 mortgage on a median priced two-bedroom condo, for example, a first-time buyer would have mortgage payments of $1,158 per month — little more than the cost of renting a comparable unit.

In effect, today’s eligible buyer can “afford” to purchase a home priced almost twice what it was when interest rates were five per cent — not that many years ago. This reality is moderating the decline in buyer interest.

The good news for local sellers is the modest magnitude of the price decline. The bad news is it now takes much longer to sell a property. If not well-priced, it likely won’t sell at all.

For buyers the news is even better. They have many properties from which to choose and lots of time to shop around. Nor need they fear walking away from unrealistically-priced properties. The longer they wait to make a deal, the more likely they are to get a lower price.

The record-low mortgage rates, combined with Victoria’s low unemployment rate, are providing significant price support for local real estate — for now. We remain vulnerable to more drastic declines.

Even a one or two per cent rise in interest rates would knock out our main pillar of price support. At the moment however, with Canada’s and the world’s economy still in a somewhat upward sputter mode, imminent rate increases are not likely. But when they eventually do rise, we can only hope they do so in small increments, over a period of several years.

I remain in the camp of those who argue our Canadian real estate markets are in for a soft-landing, rather than a U.S.- style catastrophic crash. The main reason for this cautious optimism is Canada’s average homeowner enjoys a 69 per cent equity stake in his home, more than twice the level that existed in the U.S. when their market collapsed.

Canadians feel much less pressure to drastically lower prices in order to sell their home. This may explain why our own house prices have fallen only modestly.

Prospective or current homeowners who have the opportunity, would be wise to consider a five-year fixed mortgage and to avoid the variable rate mortgage. In doing so, the homeowner can achieve peace-of-mind for at least five years.

 

A retired corporate executive, enjoying post-retirement as an independent financial consultant, Peter Dolezal is the author of three books. His most recent, The SMART CANADIAN WEALTH-BUILDER, is available at Tanner’s Books, and in other bookstores.