Will the new year bring softer prices and slower sales for housing in the Lower Mainland?
December always brings out the crystal ball to predict the next year’s real estate market performance. So, if we make it through December (assuming the Mayans were wrong), here is what I’ve cobbled together for a 2013 outlook.
We’ll continue to see slower-than-average sales in December. Smart sellers should get an earlier start to the spring season and list their homes in January and February instead of after March. Houses will take longer to sell, and anyone waiting for the “spring market” will be looking at another general softening of prices.
Economists are suggesting the Bank of Canada is unlikely to increase target rates until early 2014. Without an increase in interest rates and no rapid influx of external buyers, pre-approved buyers are unlikely to jump on purchases and will wait for those prices to come down. Dan Ashton of Dominion Lenders told me his pre-approvals are sitting 11 months before committing to a purchase.
If you add up sluggish interest rates, modest economic growth, stable inflation and external international conditions, what will support a change of direction in the housing market?
Henry Li of TD Canada Trust Mortgages had an interesting mathematical solution. The effect of an increase on basis points reduces the purchasing power of buyers. All things being equal, most people look at the purchase price instead of the purchasing power of their interest rate. If you committed to a new mortgage at today’s low rates and the Bank of Canada increases them during the term of your mortgage, you effectively save money on the purchase.
At 2.99 per cent on a five-year fixed mortgage rate the monthly payment is $1,615, and at 3.45 per cent for a five-year fixed mortgage rate the monthly payment is $1,697. The purchase price will have to drop by approximately $20,000 to have the same monthly payment as 2.99 per cent mortgage rate.
If interest rates do increase, it also affects your ability to borrow. Based on a 2.99-per-cent interest rate, the minimum required income is $63,000, at a 3.45-per-cent interest rate minimum income required $66,000, and so on. As your interest rate increases, your purchase power will decrease.
There is also the lost opportunity in a buy-up market. Very few people are able to buy down and sell up in the same market. Houses listed at $550,000 that have lost five per cent of their value in the last month can make their money back by buying a $700,000 home that has lost five per cent as well. The savings at the higher price can be greater than the loss of the lesser-valued house. If you buy in an area that has devalued faster, then your savings increase again.
TD Canada Trust chief of economics Craig Alexander has said that “increments “expecting a 50-basis-point hike next year, thereby bringing the central bank’s benchmark rate to 1.5% by the end of 2013. He expects a similar 50-basis-point hike in 2014.”
At some point, house prices will become attractive enough to balance low interest rates and purchasing power to swing the pendulum back to a more robust market. But predicting when that will happen will require a much bigger crystal ball than mine.