Buyers Beware: GTA on Alert
One of the events hitting the news countrywide is the fact that the Toronto Housing market is soaring. And by soaring I mean its flying out of control. Buyers are over-bidding for houses and even foregoing inspections just to become homeowners.The CBC quoted Toronto as a generational ghost-town as millenials are forced to move back home as rent has skyrocketed. So with the booming house market and no end in sight - doesn’t it make sense to get in all the fun because the price is bound to go up? Although this seems like an offer too good to pass up especially considering the ultra-low financing rates for mortgages. With all these factors though - the housing market in the GTA scares me on a deep level. What happens when the bubble pops? Or the rates go up and defaults go up. What happens to everyone living paycheque-paycheque? Many people are living pay-cheque to paycheque and cannot bear the burden of even a 0.5 point increase in the interest rates.
Now some of the methods that are up for debate for cooling off the markets are putting in a foreign-buyers tax and raising the interest rates to cool -off the market deterring potential buyers and segmenting serious ones as they are the ones will pay to get houses.
So exactly why do I say not to touch the housing market?
In my personal opinion, I think that interest rates are going to rise. One of the reasons I am a firm believer of this is that we need to keep pace with the US. Since Canada last lowered the rates to the current 0.5% the US has already raised rates twice with several rate increases anticipated in the future. The Canadian Dollar has also lost a lot of ground to the US dollar now trading at a 30% spread between both dollars. People argue well it makes exports cheaper but our imports are also a lot more expensive. Keep in mind we import a lot of our food, so while we benefit with the exports we get burned on the other end. If you are someone buying a house in the GTA for an investment tread carefully with the interest rate. In Canada, we have one of the highest debt-liquidity ratio around 1.6. This means for every dollar Canadians own on average we owe 1.6 dollars to someone else in the form of a loan, mortgage, line of credit or other financial obligation. A small increase in interest rates will put a large strain on the financial lives of many families. Combining the increased payments in loans and mortgages can push up default rates increasing pressure on banks - which will put a strain on the system itself.
If we play around with some numbers assuming a 5 year fixed term, 200k mortgage at a rate of 2.7% and Amortization period of 20yrs monthly payment = 1077.92$ per month
If the interest rate increases by 0.5% to 3.2% keeping all the other factors constant the new mortgage payment is 1127.19$ - a difference of 50$ a month. While this may not seem like a particularly large amount - keep in mind if people have multiple loans this increase will occur on all obligations (excluding credit cards) and might push people living hand to mouth over the edge. The landscape of the market will completely change forcing many people to change their budgets and spending habits.
Addressing the issue of a bubble:
For once let’s pull a line from Trump’s dictionary and that’s the word bubble. This concept is easily confused but critical to grasp: A bubble or housing bubble is defined as a rapid rise in the prices of houses fueled by demand, speculation and positive momentum. Many buyers enter the market exceeding the supply of houses, allowing homeowners to drive the price up to the highest bidder. As the price catches fire - SPECULATORS enter the market further pushing the price higher.
So when does the bubble pop: Like anything the bubble will pop when buyers no longer feel the price they are paying is worth the opportunity. What happens now is the opposite effect a drop in house prices occur - taking everyone down.
As far as my suggestion goes for the GTA housing market - do not buy the house for investment purposes at this point. However, if you plan on settling down in the area and are content with having the home for a long period of time then fluctuations in the housing prices should normalize over time. Although it is nice after a long period of time that you are able to net a profit out of your primary residence if you sell it back at par value - think of the experiences and memories you built in that period which in some cases is priceless.
What are your thoughts on the situation?
Disclaimer: All of the above information is my own personal opinion. It should not be used as professional advice. Examples provided are for learning purposes only.