Time to buy? How the numbers shake out with recent sales slowdown & rate increases.

As predicted, with interest rates rising, housing prices are cooling off.  A tale as old as modern-banking-day-time. 

So, where are we in this “cooling off” transition?  Assuming you are a first-time buyer and have been waiting for post-pandemic sky-rocketing prices to subside, or even slide, let’s look at the difference if you bought now versus buying at the peak of the market back in February:

When the pandemic hit, the Bank of Canada (“BOC”) quickly reduced the overnight lending rate from 2.0% to 0.5%. This was kindling for the fire that fuelled housing prices to soar to +29.0% between January 2021 and January 2022.  Now the BOC has been forced to raise rates - and quickly - to combat inflation not seen since the 1980s. To put things in perspective, we’re not even back to pre-pandemic interest rate levels. The bank rate is currently at 1.75% which is still 0.25% below the pre-pandemic rate of 2.0%. 

I was curious to understand if the average cost (specifically mortgage costs) of owning a home has decreased, given that the cost of borrowing is quickly coming back to pre-pandemic levels. 

For this analysis, let’s look at the average price of a condo in the GTA.  In January 2021, the average price for a condo in the GTA was $601K, and in February 2022 the price rose a staggering 33.0% to $799K for roughly the same property.  Throughout this period, interest rates remained UNCHANGED.  

Between January 2022 and June 2022 we have now experienced 3 rate increases. So, what happened to condo prices? And how does that impact the cost of a mortgage? 

Average GTA Condo Price

• February: $799,000

• June: $747,000

Chg: -7.0%

 Corresponding monthly mortgage payment

• February, buying at $799K: $2,649/month

  • (Assuming a 1.75% variable rate mortgage, 10% down payment of $79,900, 30-year amortization).

• June, buying at $747K: $3,111/month

  • (Assuming a 3.5% variable rate mortgage, 10% down payment of $74,700, 30-year amortization).

Chg: +17.4%

*Keep in mind that if you chose a variable mortgage in February, your payment would now be closer to $3126/month with the 1.25% rate hike, roughly the same as if you purchased in June. 

What does this tell us?

Condo prices came down 7.0% but the monthly cost to mortgage the condo rose by 17.4%. Hmmm, not great. This means that condo prices have not yet come down far enough to offset higher borrowing costs. 

Why?

Interest rates are temporary, the price you pay is forever.  

I calculated the total interest paid on a 30-year amortization for a condo in the GTA purchased in February at $799K versus the same condo purchased in June at $747K. If you assume an average variable rate of 3.5% over the course of 30 years, you will save roughly $30,000 in interest paid if you bought the condo in June for $747K.  

When you break down the numbers in this way, it still makes sense to take a chance on variable rates, endure the (hopefully) short-term pain of higher rates, and “buy the dip”. Over the course of a 30-year mortgage, it is better to have paid a lower price for the asset as this will never change. This will have a significant impact on the interest paid over your total mortgage amortization period.  

What should you consider?

Although rising interest rates are making buying even more unaffordable, interest rates are temporary. The price you pay for your home is permanent. As prices continue to come down this summer and into the fall it will be an excellent time to buy when considering the long-term horizon.  

Let’s chat,  

-Steve