A crucial question faces prospective homebuyers in many of Canada’s priciest cities as the spring approaches. Is it better to wait for further interest rate declines, widely expected later this year, or start the house hunt now ahead of a potential rebound in prices?
Home sales in December and January have bounced back from the lows of the latter part of 2023, with the number of newly listed properties also edging up, according to national data from the Canadian Real Estate Association (CREA). But with the volume of sales still well below the 10-year average, prices continue to decline in many markets.
Would-be buyers are largely waiting for borrowing costs to drop lower, as several financial analysts forecast the Bank of Canada won’t cut its trend-setting interest rate until June or later this summer. But some economists believe prices and competition will quickly heat up by then as borrowing becomes less expensive.
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For those who could afford to purchase a home at current rates, the dilemma is whether to prioritize prices or rates.
In Vancouver, realtor Mike Stewart believes “this is absolutely the time to buy.”
In today’s market, house hunters may be able to mull making an offer over the weekend instead of rushing to submit their bid by the end of the day to try to beat the competition, as was the case during last year’s short-lived but intense spring market rally, he said.
And, most importantly, there are still opportunities for buyers to negotiate on price, he added.
In Toronto, John Pasalis, president of Realosophy Realty, said he’s seeing a growing share of properties attracting multiple bids and selling for over the asking price. But those tend to be nicest, picture-perfect homes, he added.
However, buyers who are ready to purchase properties that might need some work will still find less competition and a chance to buy for below the asking price, according to Mr. Pasalis.
“If you want the flexibility to negotiate – and quite frankly, to find more value – you need to be bidding on the homes that are not the prettiest,” he said.
Over all, Mr. Pasalis also believes prices trump rates. “You marry the price, and you just date the rate,” he said, using an oft-quoted piece of common wisdom in the real estate industry. In other words, the price a buyer paid doesn’t change, but they get a chance to renegotiate their mortgage rate every few years when their loan comes up for renewal.
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Still, with five-year fixed mortgage rates still in the 5-per-cent range and variable rates firmly above 6 per cent, signing up for a new mortgage now promises to be a pricey date.
To be able to take advantage of future interest rate declines, many of today’s buyers are signing up for fixed-rate mortgages with a term of three years, rather than the usual five years, which has traditionally been the most popular choice, said mortgage broker Frances Hinojosa, CEO and Co-Founder of Toronto-based Tribe Financial Group.
While it’s possible to lock in a fixed rate for even shorter period, mortgage rates with terms of less than three years are significantly more expensive and less attractive right now for most buyers, Ms. Hinojosa said.
Another option is to choose a variable interest rate, which moves up or down following changes in the Bank of Canada’s key rate. That’s becoming an increasingly popular choice amid expectations of rate cuts over the next few months, according to a recent analysis by Scotiabank economist Farah Omran.
But those who choose a variable rate should be comfortable with the risk that comes with it, said Ms. Hinojosa. That includes the possibility that the Bank of Canada won’t cut rates as soon or as deeply as expected.
And borrowers should be prepared for the fact that the ultracheap borrowing of the early states of the pandemic – when homebuyers were snapping up rates in the 1- to 2-per-cent range – aren’t coming back, barring major economics shocks, Ms. Hinojosa said.
And there is always the possibility, however small, that rates will climb further still, she said. “If the last five years have taught us anything, it is that anything can happen.”
The most important thing for prospective buyers is to ensure they are financially fit for a home purchase.
To do that, she recommends that clients get a mortgage preapproval to understand how much they can borrow. She also encourages them to “test-drive” the estimated carrying costs of a new home within their existing budget, setting aside an amount equivalent to their expected mortgage payment, plus utilities and monthly savings for property taxes and any condo fees, as well as a rainy-day fund for the inevitable home repairs.
“My advice to clients is, the right time to buy is when you’re ready to buy,” she said.