18 Sep

Benefits of Homeownership Reaffirmed in New Study

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Posted by: Iko Maurovski

Despite deteriorating housing affordability across the country, buying a home is still the more affordable option when compared to renting.

A new report from Mortgage Professionals Canada has determined that, despite the rapid rise in home price, those who are able to invest in a home would end up “significantly better off” in the long term compared to renting.

The report, authored by the mortgage broker association’s chief economist Will Dunning, found that while upfront monthly costs are in fact cheaper in most locations, the “net” cost of ownership is less than the equivalent cost of renting in a majority of cases, and becomes even more cost effective over time.

“The costs of owning and renting continue to rise across Canada,” Dunning noted. “However, rents continue to rise over time whereas the largest cost of homeownership–the mortgage payment–typically maintains a fixed amount over a set period of time – usually for the first five years. The result is that the cost of renting will increase more rapidly than the cost of homeownership.”

Additionally, the costs of ownership include considerable amounts of repayment of the mortgage principal. “When this saving is considered, the ‘net’ or ‘effective’ cost of homeownership is correspondingly reduced,” Dunning added.

On average, the monthly cost of owning exceeds the cost of renting by $541 per month. But when principal repayment is considered, the net cost of owning falls to $449 less than renting.

Interest Rate Scenarios

The analysis compared the cost of renting vs. owning both five and 10 years into the future, with higher interest rates factored into the equation. In all cases, owning comes out ahead:

Scenario #1: If interest rates remain the same (using an average of 3.25%), after 10 years the average net cost of owning is $1,014 less than the monthly cost of renting.

Scenario #2: If interest rates rise to 4.25% after five years, the average net cost of owning falls to $1,295 less than the monthly cost of renting.

Scenario #3: If interest rates rise to 5.25% after five years, the average net cost of owning is still $726 less than the monthly cost of renting.

“By the time the mortgage is fully repaid in 25 years (or less) the cost of owning will be vastly lower than the cost of renting,” the report adds, noting that the cost of owning, on average, would be $1,549 per month vs. $4,655 for an equivalent dwelling.

Canada Still a Country of Homeowners

Despite rising home prices and deteriorating affordability, Canada remains a nation of aspiring homeowners.

The study pointed to the continued strong resale activity as one indicator of this.

Resale activity in 2017 was still the third-highest year on record, at 516,500 sales, just off the peak of 541,2220 sales in 2016.

But other polls have also found a strong desire among younger generations that still dream of owning.

RBC’s Homeownership Poll found a seven-percentage-point increase in the percentage of overall Canadians who planned to buy a home within the next two years (32%), and a full 50% of millennials.

Similarly, a RE/MAX poll found more than half of “Generation Z” (those aged 18-24) also hope to own a home within the next few years.

Perhaps the biggest question is whether those aspiring homeowners will have the means to surpass the barriers to homeownership, namely larger down payments and the government’s new stress test.

“While recent changes to mortgage qualifying have made the barrier to entry higher, those who can qualify will be much better off in the long term,” Paul Taylor, President and CEO of Mortgage Professionals Canada said in a statement. “Given the economic advantages of homeownership, Mortgage Professionals Canada would recommend the government consider ways to enable more middle-class Canadians to achieve homeownership.”

Despite its affordability benefit over renting, Dunning addresses some of the impediments of homeownership, namely the longer timeframe needed to save for the down payment. Despite higher home prices and larger down payments required, first-time buyers still made an average 20% down payment.

Additional Tidbits from the Report

Some additional data included in Dunning’s report include:

  • Average house price rose 6.2% per year from $154,563 in 1997 to $510,090 in 2017
  • Average weekly wage growth was up just 2.6% per year from 1997 to 2017
  • The average minimum interest rate for the stress test during the study period: 5.26%
  • The average annual rates of increase for the following housing costs:
    • Property taxes: 2.8%
    • Repairs: 1.9%
    • Home insurance: 5.4%
    • Utilities: 1.6%
    • Rents: 2.4%

Your Interest is my Only Interest

 

11 Sep

Here’s what Canadian homeowners should know about the housing market in September

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Posted by: Iko Maurovski

The Canadian housing market is facing significant headwinds heading into the fall, and it’s still unclear how it will navigate them.

From a rising interest rate environment, to worryingly high levels of household debt, there are several factors the industry experts are telling homeowners and would-be buyers to consider.

For a closer look at what could affect the market this month, Livabl has rounded up the latest industry commentary, to keep you in the know.

An interest rate hike is on its way

The Bank of Canada chose not to hike the overnight rate this week — but that doesn’t mean it won’t in the near future.

In its release, the Bank noted that the housing market is “beginning to stabilize as households adjust to higher interest rates and changes in housing policies.” That, combined with an acknowledgement that the debt burden among households is starting to lower, has TD senior economist Brian DePratto predicting that the Bank will choose to hike the overnight rate in October.

“The Bank of Canada made it clear that it is still on track to raise interest rates again this year,” he wrote, in a note. “The Canadian economy is indeed evolving in line with its projections, with the desired rotation of demand towards investment and exports, and a stabilization of the housing market after a difficult start to the year…We believe the BoC will raise interest rates at its October meeting, consistent with its gradual approach to policy normalization.”

As the overnight rate climbs, mortgage rates will also be pushed upwards, possibly causing some would-be buyers to reconsider entering the housing market. Beyond causing a slowdown in activity, a rate increase would weigh on existing homeowners, who might struggle to make higher mortgage payments.

Affordability is deteriorating

As interest rates moved upwards, housing affordability deteriorated in most major Canadian markets last quarter.
The Bank of Canada hiked the overnight rate to 1.50 per cent in July, and mortgage rates followed suit.

The ratio of homeowners mortgage payments in comparison to their income, known as MPPI, rose 0.2 per cent in Q2, after a 1.2 per cent rise in Q1, marking 12 months of consecutive deterioration. In total, seven of 10 major markets saw their MMPI rise last quarter.

“Mortgage interest rates were on the rise for a fourth consecutive quarter in Q2,” wrote National Bank economists Matthieu Arseneau and Kyle Dahms. “Unsurprisingly, the rise in interest rates hit harder for the priciest markets in the country.”

Household debt is still a concern

That deteriorating affordability is bad news for Canadians household debt levels, which are still worryingly high.

“Risks around housing appear to have dissipated with the national market stabilizing in recent months,” wrote BMO senior economist Benjamin Reitzes, in a recent note. “[But] household debt is an issue that isn’t going to be resolved anytime soon.”

While Canada’s debt-to-disposable income ratio eased from 169.7 to 168 per cent in the first quarter of 2018, Canadians still have some of the highest debt levels in the world.

“The [Bank of Canada] is continuously collecting data on how households are coping with rising rates, while the macro data suggest the moves have been manageable thus far,” wrote Reitzes. “The slowing housing market and new mortgage rules have caused debt growth to decelerate, but it’s going to take time to work off debt burdens and bring debt ratios down.”

Your Interest is my Only Interest

Iko M.

Mortgage Broker

647-200-0723

http://ikomaurovski.com/