There is no end of headlines citing reports by economists, think tanks, etc., quoting statistics galore about what is happening and will happen with real estate values. All of the endless speculation does little to quell the fears of first-time homebuyers, or in many cases, current homeowners.
It is worth keeping in mind that the best predictor of what will happen tomorrow is often what happened yesterday. Certainly, the real estate market movements tend to be far less erratic than the stock market.
Although real estate transactions are also driven on emotion, the ability for the real estate market to react to short-term emotional swings does not exist in comparison to the stock market.
The process of selling a home is tedious, taking days or weeks to get to market from the time a decision is made to sell. The process of selling shares on the stock market takes seconds and thus market sentiment, rumour and whim play a much larger role in valuations.
A recent story in the Globe and Mail traces back the story of a local Vancouver buyer currently shopping for a $3 million home. There is a valuable lesson in this story. More than once the message conveyed by the subject, Patricia Houlihan, is, “Buy as soon as you can buy, and buy whatever you can afford to buy.”
Sage advice that just about any current homeowner would echo, along with the comment that they wish they had bought sooner.
It should be noted that it is her eighth home over a span of decades, not her very first purchase.
Although many buyers historically bought one house, maybe moving once, and then stayed put for decades, today’s urban buyers, since the 1990s onward, have often started out with something smaller, older or perhaps even a condo and made the best of it.
As Ms. Houlihan points out, for the past few decades the typical homebuyer’s ability to save has not kept pace with property appreciation. Here’s some numbers:
Five per cent down on a $200,000 purchase requires $10,000.
Even a 1% annual appreciation on the property ($2,000) represents an effective 20% gain on the cash invested.
Factor in current mortgage reduction (50% of the monthly payment) and you have another $450 per month building in equity.
Based on today’s five-year fixed rate of 2.64%, an income of $36,000 per year qualifies a buyer in the above scenario.
It is unlikely this person will be able to save $7,500 per year while paying rent as well.
A toehold in the market is how many of us began since the 1990s if not the 1980s. It is not about buying your ‘forever home’ the first time around, it is about getting a start.
Few who bought in the 80s and 90s expected granite counters and stainless appliances. It was carpet and linoleum, hardwood and tile. The expectations of today’s first-time buyers have shifted and that has played a role in increasing prices as well.
The bottom line is that you have to start somewhere, and you have to live somewhere while working towards the dream home. Buying less-than-desirable homes to start with, as Ms. Houlihan did, is work to be sure. That is okay as few of us will ever save our way to our dream home. But we can work our way there.
Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group.