Recently, after more than a decade of crazy real estate growth in Vancouver and Toronto, 2 of Canada’s most popular real estate investment destinations, sales activity and prices have finally started to slow and decline. Those of us who have been holding off on purchasing a home are seeing this as an opportunity to finally pull the trigger, and enter the real estate market.
When it comes to buying a home, there is always uncertainty. Most people are unsure about the timing. What if the prices are increasing? “We better by right away!” What if the prices are decreasing? “Let’s hold off for a little while longer”. There are always a hundred questions with a hundred different answers. The truth is, like any other investment, buying a home will always have inherent risks involved.
Despite this, we can still offer some advice on what to think about when it comes to making possibly the biggest financial decision of your life. Here are 4 tips to help you decide on when to purchase a property:
Within each region, there is a real estate authority which governs realtors and collects data on the region. For example, in Vancouver there is the real estate board of greater Vancouver. A very important piece of data to analyze market conditions is the sales to active listings ratio. Simply put, this is a measure of the percentage of properties actually sold as a percentage of total properties listed for sale. For example, if 200 properties sold out of a total 1000 properties, the ratio is 200/1000 = 20%
The generally agreed upon idea is that if the ratio is 20% or higher, it is considered a seller’s market, meaning the conditions are favourable for the seller. If the ratio is 11% or lower, it is considered a buyer’s market (favourable for the buyer). Anything in between is balanced.
For most people, buying a home means taking on a mortgage. Taking on a mortgage means monthly payments. The interest rates are currently rising in Canada, which means that borrowing money will be more and more expensive. For some people, they dream big and borrow the absolute most they can afford to stretch their budget to the limit. Unfortunately, when interest rates rise, as they have multiple times in the past year, it could mean breaking the buyer’s budget and in the worse case scenario, losing their home. Make sure that the potential cost of borrowing is within your budget, even if the interest rates go up further.
People could buy homes for the sake of residence, or for the sake of investment. If you’re buying a home to live in, there tends to be a bit more leeway on timing your purchase. Your purchase in this case is a long term investment, and whether the price goes up or down, you’re going to be living there regardless. Just like the stock market, the real estate market also trends upwards over time, so planning to hold an investment for a long term helps reduce your risk in both cases.
How much money do you have saved up for the down payment? Although some lenders are willingly to lend money when you have as little as 5% down payment, make sure you understand the rate that they are charging. Generally speaking, the less down payment you have, the higher interest rates lenders will charge you.
Another thing to consider is your credit. This can also affect the rate of your mortgage. The better your credit, the lower your rate, generally speaking. If your credit could use some work, it may be worth putting off the purchase until you have improved your credit. If you’re interested in learning more about credit scores and reports, along with their benefits, please take a look at our educational articles regarding credit. These articles will help you achieve a better understanding of the credit system!
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.