Owning one’s own home remains a high priority for many Canadians.
The aspiration to own a home remains a worthy objective. However, to a greater degree than ever before, Canadians cannot embark upon ownership without a sound appreciation of the emerging risks.
The single greatest risk is not the ability to afford today’s mortgage payments when rates are at historic lows, but the ability to meet payments if rates increase by 2 to 3 percent once the initial mortgage term expires.
Will the home still be affordable?
The simplest and surest way to enhance affordability is to delay buying a home if, in the process of qualifying, one barely meets the minimum income and debt-service benchmarks. Ideally, a larger down-payment of at least 20 per cent will not only avoid many thousands of dollars of high-ratio mortgage insurance premiums, but also mean lower monthly payments.
Another prudent approach, especially for the first-time buyer, is to opt for the lowest-possible rate on a 5-year fixed-term mortgage. Choosing the slightly lower variable- rate option would leave the borrower vulnerable to increases in the prime rate. If one can lock-in for 5 years at a rate approximating 3 per cent, the mortgagee should be able to cope with the impact, if rates do increase by the end of the term.
The most important, and perhaps most challenging, risk-management strategy is to moderate the appetite for the biggest and best home for which they qualify.
Outside North America, much of the developed world’s population live in condos or apartments. Slowly but surely, the high cost of home ownership is forcing many Canadians to follow suit. Today, some 30 per cent of new-home construction is condo units. Twenty years ago, the figure was only 9.4 per cent. This trend is likely to continue.
This shifting demand represents an emerging risk: fewer buyers for larger, single-family homes, thus moderating future values. Over the long-term, single-family home price increases are likely at best, to match inflation.
In the last 15 years, the average Canadian’s net worth has risen by about $125,000, to $480,000. Virtually all of this increase however, has come not from savings and investment, but from rising real estate values. If real estate prices were to adjust downward, much of this increase in net worth would be erased.
A 10 per cent value adjustment is certainly not out of the question. Recently, the Bank of Canada expressed concern that national house prices are from 10 to 30 per cent overvalued; the International Monetary Fund set Canada’s home overvaluation at a minimum 10 percent. Both conclusions were based on well-established historical relationships between home prices and family incomes.
As long as we can clearly afford the home we buy and view home ownership not as a ‘sure thing’ investment, but rather a long-term vehicle for a comfortable lifestyle, we can enjoy it and remain relaxed about the obligations home ownership entails. No longer should home ownership be viewed as a means for substantial equity growth through ever-increasing demand and upward price adjustments.
Peter Dolezal is a retired corporate executive, enjoying post-retirement as an independent financial consultant.