Prices are coming down but rates keep heading up. What does this mean for you?
Over the past several months as interest rates have continued to trend upward, the real estate market has slowed down. And as more buyers take to the sidelines to wait out the return of lower rates the prices of homes that were at record-highs last year have started to drop.
Prices in Alberta have been some of slowest to fall and actually saw a minor (0.2% increase) last month. But with rates continuing the climb and more Albertans choosing condos over detached homes, we’re expecting more downward pressure on prices this winter.
If you are considering purchasing either in Alberta or elsewhere this winter, here are some things to consider.
Mortgage Flexibility
If you’re considering buying this winter as prices start to come down, then you’ll want to consider future plans and the flexibility of your mortgage term as much as you consider your rate itself. Remember that if you choose a 5-year fixed term (as most buyers traditionally do) then when rates do come down (which they will) you could be stuck paying your higher rate until the end of the term or paying steep prepayment penalties to break your term and get into a lower rate sooner. If your situation allows, it may be more cost effective to:
Opt for a variable rate, knowing that you may be on the hook for a higher payment for a short time but have the option of locking into a fixed rate at any time
Secure a static payment with your variable rate that covers both principal and interest and again know that you have the option of locking into a fixed rate when they come down
Choose a shorter term fixed rate and know that although rates may come down before your term ends, your renewal will come around quicker and allow you to renew into the then-lower rate without penalty
Always do the math
As property values continue to correct across the country there is a sentiment that even at lower prices, purchasing will still be out of reach with rates as high as they are. But we always recommend crunching the numbers because, as you will see in this example, that isn’t necessarily always the case. Check out this comparison of a purchase at the national average CREA sold price this year over last:
November 2022
Purchase Price: $644,643
Minimum Down Payment: $45,126
Mortgage Amount: $623,498
5 year fixed rate: 4.99% (25 year amortization)
Monthly payment: $3,622.75
Balance at renewal: $551,755.77
February 2022 (Peak)
Purchase Price: $816,720
Minimum Down Payment: $57,171
Mortgage Amount: $789,931
5 year fixed rate: 2.4% (25 year amortization)
Monthly payment: $3,499.41
Balance at renewal: $667,229.96
There are two main things that are worth pointing out in this example. First, you’ll notice the monthly payment is actually fairly close, given the rate difference. Second, the balance owing at renewal is so much lower. We haven’t experienced downward momentum on prices quite like this in Alberta yet, but it is a great illustration of how the interest rate alone can sometimes be a deceiving.
Time in the market over timing the market
No matter what is happening in the market, there will always be a debate over when the best time is to get into the market. But in truth, the best time to get into the market is when it works for you, your family, and your finances.
Remember that all time in the market is good. Real estate is a long game and even though the market will inevitably experience some ebbs and flows along the way, history shows us that no matter what, it will always trend upward. Even as the market has been correcting in the post-pandemic world, Canadian homeowners are still seeing an average of 6% appreciation on their properties year-over-year. So no matter when you get in - whether it was last year when rates were at rock-bottom, or it’s today when things are balancing out, as soon as you are ready to make that purchase and start making payments you are gaining equity in your home and building wealth.
But what’s more than that? Whenever purchasing is right for you and no matter how it looks, you will be building a home and that is more important than any numbers on a screen.
If you’re considering purchasing, have questions about your past purchase or simply would like to discuss what the current real estate and rate landscapes look like for you, reach out to the Happiness Creators. We are here to help you navigate it all!
