Fight or flight. Most of us are familiar with the term that perfectly describes our human response to acute stress. Less familiar is the third “F,” and it’s not what you’re thinking. The full spectrum of possible stress responses is actually: fight, flight, or freeze.
There is no denying that investing in real estate, whether for personal use or for income purposes, can be a source of anxiety. Inventory is at historic lows, and it seems that any property that is priced appropriately is in high demand. Potential buyers for these properties will, in all likelihood, have one of the aforementioned stress responses.
The fighters go to war. Bidding war, that is. Sometimes the price paid for a property that has become the subject of a bidding war shatters all expectations, leaving everyone involved absolutely speechless. One successful bidder enjoys the rush of a “win,” and real estate becomes the trophy.
Those whose instincts are to flee may rationalize that the market is “ridiculous,” that people who buy at these soaring prices are, “insane,” and insist that they “will not be suckered into a bidding war.” They refuse to play the game, and would rather rent than feel that they are not in control of a negotiation.
First time buyers and others who haven’t had to deal in real estate for many years may be more prone to the third response. They may temporarily freeze. Young adults may feel that they should be ready to own a home. Others may find themselves with their own mortgage paid off and wondering whether to invest in an income property for rental purposes. But is now really the right time? Should they wait for the market to cool? Should they wait for more options to come on the market? Waiting is a lot like freezing…it may be the right decision, but only if there is something better after the wait is over.
The fear (which, by the way, is the “F” word that starts the whole process rolling!) of overpaying is usually at the root of the Freeze response. “What if,” becomes the mantra that stalls any action.
No one can tell you if now is the right time for you to buy. We can tell you that analysts are predicting growth for the coming year. We have no way of knowing whether sellers will decide to increase inventory by listing more properties in the upcoming months or years, so we cannot say for sure whether supply and demand will begin to equalize.
We can state with a measure of certainty, though, that a cooling off of the current market will only come under specific conditions that will have to be factored into a future buying decision.
One of those conditions involves an increase in interest rates. Part of the reason that our market has continued to be so strong is because lending rates have stayed very low. (The alliteration continues…you might say there has been a bit of a frenzy. OK. I’ll stop now.) In an effort to prepare for an inevitable, eventual rise in borrowing costs, Ottawa has instituted the now-familiar stress test for buyers who need to borrow more than 80% of the value of their purchase. In a nutshell, this test ensures that applicants could carry the payments on their loan even if the rates went up to 4.64%, despite the fact that they may actually only be paying 2.59% for the current term of the mortgage.
This governmental action demonstrates an expectation that rates will climb. We cannot assume that the market will go down to coincide with this increase, but for purposes of illustration, let’s do the math on a 10% drop in housing prices.
*For the sake of simplicity, we have used a 20% downpayment with no CMHC premiums.
It goes without saying that if house prices stay stable, or even increase, despite a rate hike, the situation will be even worse for those who have attempted to wait out the market in hopes of a better opportunity.
Our best advice, if you are on the fence about whether now is the right time to get into the market, is to talk to a qualified professional about your options. Find out what the real cost to you will be, and make a well-informed decision.
We are always available to help you get answers to your questions. Please don’t hesitate to reach out, no matter what stage of the process you are in. We’d love to hear from you!