Sean Willis

Chief Evangelist & Sales Representative

Posted on April 6, 2016 in Buying, Real Estate Advice

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If you are waiting to buy Toronto Real Estate, you’re not alone. But waiting could be costing you more than you think.

Many people we speak to have shared similar concerns about Toronto Real Estate being a housing bubble, climbing household debt, the Canadian economy potentially slipping into recession, and of course, the potential for interest rates to climb or housing prices to fall in the somewhat near future.

No one wants to fall victim to any of these potential situations.  While no one can say for certain what will happen, I address these concerns in my analysis How to Beat The Canadian Economy & Toronto Real Estate Market.

Even if you agree with everything I share in my analysis, it is still technically a theory. No one knows for certain what will happen. While being able to support a theory can go a long way, it’s always helpful to have an example that breaks down the numbers.

Let’s Take A Look At Why:

With an average market increase of 10 percent per year on freehold property (6 percent on condos) for the last 6 years (2016 is currently looking even higher), there is a significant argument that waiting to buy (even if there is a housing correction) will end up costing you more in the long run.

In my example below, it’s important to note that the bulk of the annual price increase happens in the first half of the year (spring market).

Let’s assume a 6% increase in the first 6 months and an additional 4% for the following 6 months:

 

Buy Today In 6 Months In 12 Months
Sale Price $800,000 $848,000 +$48,000 $880,000 +$80,000
Annual Taxes $5,645 $5,984 $6,209
Price Increase   6%   10%
Interest Rate 3% 3% 3%
Min. Down Payment $55,000 $59,800 +$4,800 $63,000 +$8,000
First Mortgage $745,000 $788,200 $817,000
CMHC Premium $26,819 $28,376 $29,412
Total Financing $771,819 $816,576 $846,412
Monthly Payment $3,652 $3,864 $4,006
Taxes / Fees $470 $470 $470
Total Payment $4,123 $4,335 +$212 $4,476 +$353
Income Required $154,606 $162,559 +$7,952 $167,849 +$13,243
Increased Price +$48,000 +$80,000
CMHC Insurance +$1,848 +$3,080
Additional Interest +$20,922 +$34,871
Total Cost Increase +$70,770 (8.85%) +$117,951 (14.74%)

 
*Crunch your own numbers using our mortgage calculator and the City of Toronto’s property tax calculator.

Let’s Breakdown The Numbers:

As shown above, if you have a budget of $800,000 and are waiting to see if the fall market might cool down, by waiting just 6 months, you will be spending an additional $71,000 on your investment.  This calculation takes into consideration the market increase, additional cost of the loan, CMHC insurance and the additional interest you will pay over the 25 year mortgage. If you don’t seal the deal in 2016, waiting until next spring would cost you nearly $120,000 to purchase the exact same $800,000 house one year from now.

A Few Important Things To Consider:

  • Your minimum downpayment is going to increase.  On an $800,000 house, a 6 percent market increase would require an additional $800/mo in after tax income to cover the difference.
  • While we don’t recommend borrowing the maximum amount of money the bank will lend you, waiting may lead to needing a higher income to qualify for your mortgage.
  • The result of the price increase, additional interest and CMHC increase will tack on an additional $200/month to your mortgage payment.
  • If you were originally look to purchase a house in the $950K range, the same amount of house would then cost over $1M, which will increase your down payment to a minimum of 20% (that’s a minimum of $200K in cash plus closing costs).  Even if you’re approved for over $1M, not having the $250K in cash means you’ll be shopping for less and less house over time.

For those who believe that a housing correction is imminent, you have to take into consideration that a correction would only be giving you a discount on the increased cost NOT on the price of the property.  If the market is increasing at 10% per year, there would have to be a 10% correction JUST for you to break even on waiting.  The market would then have to continue to decline even further for you to start recognizing any level of savings. There is no indication that is even close to happening.

The last major recession occurred in 1989, when market prices blew up 114% in a 4 year period between 1985-1989. As per my article The Toronto Real Estate Market Isn’t a Bubble, the housing crash happened because homes were being purchased for investment purposes not as a primary residence. Today, a majority of buyers are looking to purchase a primary residence; many wanting to start a family. According to Toronto Condo Bubble, prices declined nearly 23% between 1989-1996. Most experts agree (I haven’t found a reliable one yet who doesn’t agree) that we are nowhere even close to experiencing what happened nearly 30 years ago.

Conclusion: Don’t Wait to Buy Toronto Real Estate

Unless you are betting very heavily against the Toronto Real Estate Market, don’t wait to buy. Waiting just 6 months could be costing you close to 10% on your total investment.

Based on everything that we know today (while nothing is for certain), the Toronto market  might “cool off” in the next 12-18 months as more affordable housing becomes available and if interest rates increase. This still doesn’t mean that we will see a dramatic decline in housing value.  While it is possible for anything to happen, you have to ask yourself what the probabilities look like and if you are accurately weighing your options.

 

Still not sure?  Want more information? Have an opinion or questions?  Please share your thoughts below.

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