Posted On Jan 18, 2024

(First published January 15, 2024) [edited Feb 9, 2024]

The Canadian real estate landscape is a complex and ever-evolving market, presenting potential buyers with numerous challenges and considerations. As 2024 unfolds, many prospective homeowners are grappling with a critical decision: should they delay their real estate purchases in anticipation of lower mortgage rates, or seize the current market opportunities? This article delves into this dilemma, highlighting why postponing a purchase in hopes of a more favorable mortgage environment might not be as beneficial as it seems.

 

Where are real estate prices today?

Recent data paints a picture of a recovering real estate market in Canada. According to a Global News report, national average home prices witnessed a notable increase, reaching $657,145 at the end of 2023, which is a 5.1% climb from December 2022.  Looking specifically into the GTA area, current Toronto MLS stats indicate an average price of a detached home in the GTA was $1,418,323 in December 2023, a 2% increase year-over-year. Semi-detached home prices also increased 2% year-over-year to an average price of $1,027,432. Freehold townhouses are seeing prices at $996,162, up 4% year-over-year. Interestingly, this rise in property values hasn’t been uniform across the country. Areas like Ontario’s Greater Golden Horseshoe and some markets in British Columbia are still experiencing price declines. However, the overall trend suggests a rebound in home prices has already begun - especially here in the GTA.

 

What’s been affecting real estate prices?

While higher mortgage rates seem to be suppressing demand, rapid population growth continues to push it upward and new construction isn't keeping pace.  And while you have probably been hearing a lot about temporarily slowing down immigration until we are in a better position to properly welcome and support newcomers (including for housing - both rental and owner-occupied), the reality is that the population continues to grow (as it needs to) - continuing to push demand for housing.  From a supply perspective, Ontario is in its third year of a 10-year plan to construct 1.5 million new homes. However, the annual pace required to reach this target is not being met - as of November 2023, the pace of new construction was even slower than the 96,000 housing starts in 2022. There are predictions that the construction pace will decrease further in 2024. This slowdown is attributed to several factors:

  • Developers are facing difficulties in financing projects due to high interest rates

  • Inflation has increased the cost of building materials

  • There is a persistent labor shortage affecting the construction industry

 

Where are real estate prices heading?

There's not a lot of consensus on what will immediately happen with prices, in part because of supply and demand factors that are expected to have conflicting effects. That said, the Canadian Real Estate Association (CREA) has presented an optimistic forecast for 2024. It projects a 10.4% increase in residential property sales, totaling 489,661 units. Moreover, the national average home price is expected to rise by 2.3%, reaching around $694,173.  

Evaluating the Wait-and-See Approach

Many potential home buyers are waiting for a dip in mortgage rates before making a purchase. This strategy, however, has its pitfalls. Firstly, predicting the exact trajectory (when? where? how much?) of mortgage rates is challenging, if not impossible. While waiting might bring lower rates, it also carries the risk and costs of higher property prices, effectively offsetting the financial advantage of a reduced mortgage rate.

Let's examine two scenarios: purchasing a home now when prices are lower but mortgage rates are higher, versus buying when prices are higher but mortgage rates are lower. For this analysis, let’s assume you were interested in purchasing the average detached home in the GTA - which, recall, we found was $1,418,323 in Dec’23.  At 20% down, you would be getting an initial mortgage for $1,134,659 - and at 5.91% (3 yr fixed rate being offered by an A lender) your monthly mortgage payment (25 yr amortization) would be $7199.03.  Let’s assume we waited a year for rates to decrease before purchasing.  In this scenario, that average detached home in the GTA would cost $1,450,944 if prices went up by 2.3% like CREA forecasts.  At 20% down, you would be getting an initial mortgage of $1,160,755 - and if we assume a 1% decrease in the mortgage rate (to 4.91%) your monthly mortgage payment would be $6691.66 (or $507.37 less per month on the payment.  So it looks as though you would be spending $6088 less per year ($507.37x12 = $6088.44) if you waited for rates to decrease by 1% before you purchase. 

But, hold on, we didn’t account for the impact that the higher price would have on the down payment that you would need to come up with to buy later. Buying at a lower price point today, even though mortgage rates are higher, would mean having to come up with a lower required down payment - a 20% down payment on the average GTA detached home in December’23 was $283,664 (ie. $1,418,323 x 20%)  If home prices increase at that 2.3% level that CREB has forecasted, the down payment required for that same detached home 1 yr from now could be $290,664 (i.e ($1,418,323 x 1.023) x 20%).  This is a difference of $7000 - and completely wipes out 1 year’s worth of savings from a 1% mortgage rate decrease. 

[edited: We haven't even taken into account the extra expense of continuing to rent for the additional year while you wait for rates to fall.  The average monthly rent in the GTA is ~$2700/month - that's $32,400 spent on rent for 1 year longer than you may have needed to]

So as we see, waiting for lower mortgage rates likely means facing higher property prices [and prolonging rental expense], which could offset the savings made on the mortgage.

 

The Advantage of Acting Now

Entering the market now, despite higher mortgage rates, might be more advantageous than waiting. Purchasing at a lower price point not only means a smaller initial investment but also potentially reduced competition, making it easier to secure a property.  It also allows buyers to capitalize on the expected potential appreciation of their property and build equity as the market continues to recover. This appreciation could significantly outweigh the extra costs incurred due to higher mortgage rates.  Furthermore, the current market conditions in some regions, particularly where prices are still declining, offer unique opportunities for buyers to find value in their investments.

Conclusion

In summary, while the allure of potentially lower mortgage rates in the future is understandable, the real estate market's complexity and unpredictability make it risky to delay a purchase solely for this reason. With home prices expected to rise (over the short and long term) and the market showing signs of recovery, the benefits of purchasing sooner rather than later could be substantial. Prospective homeowners should carefully consider their options.

 Let's work together to get you ready for your home purchase and a Better Mortgage by Dom! 

 

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