Preparing to buy a home in uncertain times

Home prices continue to escalate and interest rates are expected to rise. What does this mean for you, as you consider buying a new home?

Real estate is the most important investment that most people will make in their life. The single biggest rule in any real estate purchase is this: Do not go into a real estate deal thinking you can pull off a quick flip. If you can hold for the long term, you will rarely go wrong.

Investor risk

In these most interesting times, the biggest risk is to the investor group. Today’s prices require significant cash invested to make that scenario work, especially if mortgage rates go up. My advice, be very careful.

If you are buying a home as your principal residence, it’s always the right decision if you can carry it, even if rates rise. The performance of the GTA market over the last several years indicates that if you wait, it’s likely going to cost you more; a lot more.

Homeownership as a principal residence satisfies many needs. The best way to protect yourself in a rising interest rate environment is to put down a large down payment, as this hedges against rate increases. If you are not able to do that, but have good cash flow, you may still be fine, and in both cases your goal should be to hold for the long term. This will likely yield price growth, despite the ups and downs, and in the end it will prove to be the best investment you ever made. After all, where else can you “enjoy” your money every day? When you walk through the front door, you know this is your home – a place for you, your family and your pets. In addition your financial gain is, so far, tax free.

Supply and demand

The law of supply and demand dictates price. As immigration continues to increase and housing inventory remains low prices will ordinarily continue to rise, or at the very least remain stable.

Can a price adjustment happen? The one scenario to be aware of is a significant increase in interest rates. Yes, rates may climb – some economists predict as many as six small increases over the next two years – and inflation has risen.

COVID and supply shortages have had an impact around the world, and the cost of living has risen everywhere. If the untangling of the supply chain doesn’t fix the problem, and the thousands of people affected by the pandemic don’t return to work, the cost of living will continue to rise. However, many experts believe that once the supply chain returns to normal, inflation will settle at the acceptable level of two to three per cent per year.

Governments, though, don’t always act rationally when people cannot afford to buy groceries, and they believe prices must be brought under control. This inflation is different, because it’s brought on by shortages, not wage increases. If the Canadian and U.S. governments overreact to inflation and raise interest rates too much or too quickly, the economy will suffer and the housing market may be detrimentally affected. Let’s hope rational thinking prevails, and rate increases are slow, measured and effective.

Confident decision

These issues can be complicated, but for you as a prospective homebuyer, your focus is more narrow: Save as large a down payment as possible, consider taking the longest mortgage you can with the shortest amortization you can afford, lock in your payments, and plan for contingencies. Remember, every blended payment reduces your outstanding principal, and this will help you with payments even if there has been a rate increase, when it’s time to renew.

Once you buy, don’t even think about your home’s value; just enjoy it and pay off as much of your mortgage as you can. The value will always be there. Face the future with confidence, knowing you made a wise homebuying – and investment – decision.