As we collectively stare down unprecedented inflation, interest rate hikes, and a looming recession, many real estate clients are wondering, “How do I protect myself?”
The best way to protect yourself in future is to understand what’s happening in the market right now.
Below are some key insights and tips about current market conditions. As always, speak to a real estate and lending professional before making any purchasing or selling decisions.
Interest rates and affordability
Over the last year, we’ve seen six interest rate hikes from the Bank of Canada as it races to stamp out inflation. With the raise of 0.50% on October 26, we’re currently sitting at 3.75%. Without a doubt, these hikes have affected affordability because they’ve translated to huge increases in mortgage rates.
We’ve gone from five-year fixed mortgages rates hovering around 1.9% last year at this time to around 5.2% or more. To put that in perspective, if we take CREB’s year-to-date median price for Calgary of $477,500, the affordability in payment for the same price, for the same product is around $800 more per month.
This is why you’re seeing more activity in the lower end of the market – the townhomes, the apartments, or condominiums – because the affordability is really starting to change.
Less product, less choice in detached
In the detached market, we’re still seeing market activity in the $700,000-plus range, but in general, those who can afford to transact at that price-point don’t have to worry about affordability.
In terms of the lower end, there is limited supply because sellers cannot command the same price point as they once paid for their properties. Buyers in current market conditions just cannot afford the higher mortgage rates, so they cannot pay as much. Sellers are, of course, motivated by what they paid for their property and won’t sell for less so many are not bothering to list.
I always caution my sellers to not view property investment this was as they overlook the power of equity. Right now, you can take out that equity and invest it in something that’s going to give you a far better return over the next five years than the housing market. There are all kinds of options if you have equity money, beyond just real estate.
Know when to shelter in place
If you're upside down and need a place to live, it's probably best to just stay put and blast away your mortgage. Accelerate your payments if at all possible, adding as much extra money as your allowed (it’s usually up to an additional 20% per year without penalty).
This will put you in a much healthier financial position when you go to renew your mortgage. With any luck, you won’t feel the rate increases as badly because you’ve paid down on the principal.
Consider open-variable mortgages
If you need a property right now, it is critical to talk to your lender or mortgage broker about your options.
Something you may want to consider in an environment like this is getting an open-variable mortgage, such as one year open/one year closed, or two years open/two years closed. Interest rates are expected to drop within two years as the Bank of Canada can only slow inflation so much by continuing to increase bank rates. An open-variable mortgage may allow you to hedge your bets until rates come back down.
Condo fees are directly related to value – in all markets
As mentioned above, a lack of inventory in the lower end of the detached segment and higher mortgage rates are driving buyers into row housing, townhouses, and apartments. While all these property types usually come with monthly fees, many sellers don’t adjust their pricing expectation to include the impact of these fees on affordability.
For example, let’s say there are two condos listed in the Mission area of Calgary that have exactly the same specs: 900 square feet; two bedrooms; two baths; and one underground stall. However, one is in an older, legacy building with a concierge at the front desk and a monthly fee of $800 while the other has no concierge and a monthly fee of only $500.
Buyers are always going choose affordability so the condo with the lower fee is going to sell for $30,000 more than the other. In general, it works out to about $10,000 in value for every $100 in condos fees, so sellers need to factor this in when pricing.
Something else to consider is that there will be tonnes of new construction coming online – upwards of 3,000 units – in the next year and a half.
While condos are more sellable at this point, more choice coming onto the market in the near future will likely translate to lower prices and sales, unless there is enough demand to offset it.
Final thoughts as we head into winter
Whether you choose to buy or sell in this moment, understanding the short and long-term risks and benefits of your mortgage terms and property types is the best way to protect yourself.
As always, if you’d like to chat about the market or get a free home evaluation, I’m happy to connect.