As prices rise and mortgage rates hit rock bottom, fears of market correction remain...
Fate turned Adam and Maya Mackenzie into first-time homebuyers before they thought they were ready to take the plunge.
In March, the couple’s landlord gave them and their two children two months notice to vacate the Burnaby house they had rented for four years.
The Mackenzies, stunned at how high house prices have climbed in Greater Vancouver, were resigned to remaining renters.
“House prices here are out of control,” says Adam, 37. “It’s frustrating when you look at how much you have to pay for a place here compared with what the same amount of money will buy you in other parts of the province.”
But just after the Mackenzies got their notice, their credit union, Vancity, launched a promotion in which it contributes part of members’ down payment. The promotion convinced them the time was right to buy.
They looked at eight homes, bid on two and paid between $450,000 and $500,000 for a 1,900-square-foot townhouse in North Burnaby. They took possession May 9.
Adam admits to being concerned about the risk of buying at a time some experts say Vancouver’s housing market is ripe for a correction. But their real estate agent told them it’s not a matter of timing the market as much as spending time in a market.
“This is a place where we can see ourselves being long term,” Adam says. “In five years, if it looks like we’d lose money on it, we’d probably be happy to stay here for another five.
“Some people wind up waiting forever and maybe never buying.”
Many Metro Vancouver dwellers will share Mackenzie’s worries about whether they should buy their first house before prices climb even higher — or wait until they ease.
“It’s the million-dollar question that gets asked every year,” says Bryan Yu, Central 1 Credit Union’s regional economist. “Is it the right time to buy or not?”
Potential homebuyers asking that question in mid-2014 will receive conflicting advice.
Experts such as Yu cite factors that could make this is an opportune time to buy. They point to record low mortgage rates and a plentiful supply of new multi-family dwellings coming onstream that is keeping condo prices — the choice of most first-time buyers — affordable.
Others, such as wealth management expert Sadiq Adatia of Sun Life Global Investments, believe first-timers should avoid the local market for now.
Adatia says Greater Vancouver is Canada’s least affordable housing market, with 82.4 per cent of household median pre-tax income needed to service the cost of owning a detached house at current prices. That compares with 56.1 per cent in Toronto and 34.5 per cent in Calgary, according to Royal Bank of Canada.
Metro Vancouver’s market is over-priced by 20 to 25 per cent, compared with 10 to 15 per cent for the Canadian market as a whole, Adatia says.
“Vancouver is the most prone to have a harder landing given how elevated the real estate market is and how much homeowners’ income goes toward mortgages,” he says.
“I am quite concerned. The more people buy right now, the bigger the fall might be for them when they sell.”
He expects to see local prices start to fall next year and decline for the next two to three years. How far they fall will depend on the economy at the time, he says.
Mortgage rates, while low at the moment, will begin to inch up later this year, he predicts.
For the past 20 years, Canadians have been buying homes above their means, secure in the belief that the value will go up, Adatia says. They forget that house values can also decline. “Find an area where you’d like to live and rent,” he says.
“That way, you get used to the area and when prices decline you buy into the market at a discount.”
Earlier this month, the Organization for Economic Co-operation and Development said house prices in cities such as Vancouver are “severely unaffordable.”
Median prices in Vancouver relative to median incomes are higher than for any other big city in the world save for Hong Kong, the Paris-based think tank says.
First-time buyers in cities like Vancouver must spend more of their incomes to buy a house and are vulnerable to future interest-rate hikes, the OECD warns.
The organization frets about Canadian household debt, which sits at 163.2 per cent of disposable income. In other words, Canadians owe just over $1.63 for each dollar in disposable income they earn in a year.
“Regardless of whether or not a housing price bubble exists, very high household debt levels represent a major vulnerability,” it says.
Yu, however, rejects the argument that Metro Vancouver’s market is overpriced.
“We do not see the market as being over-valued and (we see) no correction, barring a shock to the economy in the form of substantial employment losses or sharp upward movement in interest rates,” Yu says.
“Price levels in Vancouver will be underpinned by land scarcity, which will apply upward pressure, particularly on detached home values.”
Yu predicts median detached prices in Metro Vancouver will rise about seven per cent this year and three to four per cent in 2015.
The median price for a detached home in Greater Vancouver was $755,000 as 2014 began.
Median condo prices should increase only 2.5 per cent this year and two per cent next, he says. Greater Vancouver’s median condo price was $357,500 at the start of this year.
“Steady apartment prices and lower mortgage rates have led to improved affordability for Vancouver condo buyers in recent years, given modest wage growth in the economy,” Yu says.
The healthy supply of condos coming on to the market makes it a good time to buy a first home in Greater Vancouver, says Marty Pospischil, a Vancouver-based realtor with Dexter Realty.
“Land prices being as expensive as they are, home prices will continue to appreciate,” Pospischil says. “The return on investment has been historically excellent and, I think, will continue to be so in Vancouver.”
First-time homebuyers accounted for 25 per cent of total MLS sales in B.C. in fiscal 2013, based on applications to the provincial government’s first-time homebuyer exemption program.
Chris Menard, an area manager for specialized sales with Bank of Montreal, says low interest rates make this an opportune time to enter the Greater Vancouver housing market for the first time.
There is a risk of prices going up and down but a bigger risk is whether a buyer can afford the monthly payments they set themselves, Menard says.
First-time homebuyers may not have previously experienced ongoing costs such as maintenance and upkeep, Menard says.
“Have a realistic expectation of what those costs are going to be to mitigate your risk,” he says.
Home ownership isn’t necessarily for everyone, says Ryan McKinley, Vancity’s senior mortgage manager. But those who do plan to buy at some point can make the mistake of waiting too long, he says.
“We don’t know what’s going to happen to the market in five years but if prices continue to drive even modestly higher you could be further behind,” he says.
“The more prices rise, the more down payment you would need, and the more you would need to save.”
Considered alone, today’s rock-bottom mortgage rates — Vancity’s five-year fixed rate is 3.04 per cent — make this a great time to buy a first home, McKinley says.
As key as external factors such as interest rates are for financing a first home, a family’s internal spending habits are just as crucial for determining when a person should buy, McKinley says.
“You can have two couples who earn the same and save the same amount. But whether home ownership is right for either of them would depend on their lifestyle choices — if they go on vacations frequently or want money for other things.”
Another reason why people might wish to buy their first home sooner rather than later is that mortgage payments act as a forced savings plan, Yu says. Some people argue that it makes more sense to rent and invest one’s savings in assets that deliver higher returns, he acknowledges.
“Not everyone is disciplined enough to do that,” Yu says.
Given that the economy is growing and that Greater Vancouver’s population will continue to increase, buying a first home in today’s market makes long-term sense, Yu says. The Bank of Canada will likely hold off on raising interest rates until October 2015, he says.
These conditions also mean there’s no reason for potential first-time buyers to panic, he says.
“I don’t think buyers need to be in a rush,” says Yu. “They can take their time and find what they want. The market is relatively balanced now.”
Kenjie Law didn’t rush into buying her first home. Nor did she sit on her hands. In March, she bought a pre-sale two-bedroom condo for $384,000 in a tower in New Westminster now under construction.
Law, 24, had long promised herself she would buy her first home by the time she turned 25. But it was a financial awakening that prompted her to leap into home ownership.
For 18 months, she had been watching prices for the type of home she wanted march upward. She became convinced the Vancouver market might have ups and downs but would not burst like a bubble.
“I knew that if I didn’t set a deadline, the money I saved from renting would not be enough to afford a home,” she says. “I’ve seen people around me who’ve been watching the market miss their opportunity. I don’t want to be in the situation where I keep waiting for this so-called bubble to pop and it doesn’t pop.”