Over the past two weeks, we’ve heard a cacophony of leading economic and political voices warning us about the state of the Canadian housing market, and that of Vancouver in particular.
Last week the Bank of Canada governor Stephen Poloz came out with his semi-annual report summarizing the state of the economy, issuing a strong warning about the Toronto and in particular the Vancouver housing markets, saying that they are extremely vulnerable to a downturn in terms of prices, that the price rises seen of late in these two super hot markets are – quote- unlikely to be sustained – unquote – and that the potential for the downturn is increasing.
And just this morning the OECD issued a report that recommended the Canadian government take fresh measures to avoid further housing market inflation that may result in a crash.
These two announcements were preceded by a series of headline-makers over the previous week or so. First there was the proposal by major banks to increase the minimum down payment to 10 per cent across the board, as a supposed cooling-off measure (click here to read leading mortgage expert Peter Kinch's scathing opinion piece on this, and click here to listen to him discussing it with me on my radio show the Real Estate Therapist).
And our mayor Gregor Robertson last week reiterated his calls for a speculation tax and a vacant home tax, which is an idea that is supported by the majority of British Columbians, according to a new Insights West poll that came out just days later.
Then you’ve got the federal finance minister Bill Morneau, who told a conference last week that his ministry is very concerned about Canadians not being able to get into affordable home ownership, and about the lack of supply in Vancouver and Toronto. Morneau said the ministry is doing a "deep dive" of research into foreign ownership and market patterns to discern the most effective policy measures to help Canadians buy homes they can afford.
And the next day even Justin Trudeau himself did an exclusive live in-studio interview with BNN talking about his government’s concerns about young people and families being unable to get into home ownership, and that this was a drag on their opportunities and ultimately on the Canadian economy.
In fact, it seems virtually everybody has talking about this issue in the space of a few days – the central bank, the OECD, the prime minister, the federal finance minister, key national banks, the mayor... So much so that it makes our provincial government notable by their absence in the conversation.
So with all this noise about the dangers of the market, should buyers be fearful that this “downturn” is about to happen, and hold off buying?
Well, I actually agree with the message that BoC governor Stephen Poloz was sending out. Because he wasn't warning buyers to stay out of the market – he was simply saying that you need to factor in the risk of prices going down when you’re buying.
And I think that’s true in any market. It’s probably particularly true now, but you should always have some wriggle room, and never buy right at the top or overstretched end of your budget. And you should try to put as much money down as you possibly can, so there’s some equity there from the start.
Because here’s the thing. Nobody knows what is going to happen in our market. The PM doesn’t know, Bill Morneau doesn’t know, Stephen Poloz doesn’t know, the OECD doesn’t know, the big banks don’t know and our provincial and municipal leaders have absolutely no idea. I don't know, and you don't know.
What we do know is that real estate, just like the economy, is cyclical in nature. It will go up, and it will go down. We can be reasonably sure that, over the course of any 25- or 30-year mortgage, your home’s value will go up overall during that time, whether you purchased it during a peak or a trough in the cycle.
So, if you are a regular person who is simply looking to buy a home, you have nothing to fear, as long as you follow these three simple rules.
- Make sensible choices and don’t overstretch yourself.
- Ensure that you'd be able to refinance the home if in five years’ time it was worth a bit less than today.
- Ensure that you’d be able to pay the mortgage even if interest rates went up a bit.
Do that, and you’ll be absolutely fine. You’ll just live in the home, and pay off the mortgage, and in 25 or 30 years you’ll be free and clear, and you won’t ever have to worry about what the market is doing.
When you’re buying a home, it needs to not be about how much it is worth at any given time. It just has to be the right home for you.