Melanie & Rob McLister – CanadianMortgageTrends.com

[dropcap]A[/dropcap] few months back, RBC/Ipsos polled people who were likely to purchase a home within the next two years.

These folks were asked: “Which of the following concerns you the most about purchasing a home?”

People’s top worries were:

* Home prices increasing – 23%
* Mortgage rates increasing – 22%
* Your current debt level – 20%
* Qualifying for a mortgage – 19%
* Having a good down payment – 16%

Climbing home prices and rising mortgage rates were the top two concerns cited last year as well. Some people have a genuine anxiety over missing the boat on rates and future price gains.

For what it’s worth, CREA forecasts home prices will drop 1.1% this year. CMHC sees just a 1.6% gain.

Comment: Which is across the entire country. For us in the Toronto market, expect another annual increase in the 8-10% range, on average. In hot areas, houses could rise double that! Condos should be more moderate, in the 3-5% range, depending on area.

Either way, price growth will not exceed long-term averages (like it has been) indefinitely. As a result, fear of higher home prices is not a sound reason to rush into the market.

Comment: Unless you are looking for a house in a hot neighbourhood. A house priced at $700-800,000 today could be $900,000 in 12 months. That is certainly a reason to buy now. And if rates are even 1% higher, your mortgage just went from $3,200 (with 10% down at 3.49% & 25-year amortization) to almost $4,600. Another $1,400 is a LOT of money. And that is easy enough in a year.

As for the threat of rate increases, future rates are anyone’s guess. If you put faith in the Big 6 banks, their consensus predicts that:

* The overnight rate (which leads prime rate) will remain unchanged until 2013.
* 5-year yields (which influence 5-year fixed rates) will rise just 34 basis points by year end, to 1.93%. This implies a still-low 3.53% five-year fixed rate on Dec. 31, 2012 – assuming spreads stay the same as today.

Even if rates rise more than that this year, one could argue that doing so might have a negative effect on mortgage affordability, and thus home prices.

Whatever the case, there’s little benefit in rushing a home purchase in order to lock in a “good rate.” Most people are better off taking their chances with rates (or getting one or more six-month rate holds) and then:

a) Finding a better-value home, and/or
b) Building a bigger downpayment, and/or
c) Building a liquid 6-month emergency fund (if they don’t have one), and/or
d) Improving their income reliability or cash flow.

A great rate and short-term price appreciation mean nothing if buying a home puts you at risk of negative equity, illiquidity, a loss of net worth or insolvency.

Comment: People need to be smart and only buy as much home as they can afford, yes. But the amount of home they can afford is less each year.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
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