Despite a tricky economy and concern about climbing household debt, a survey says the portion of Canadians who are “very likely” to purchase a home in the next two years has increased from seven per cent to 10 per cent since the same question was posed two years ago. The media has been full of speculation about house prices being unsustainable in Canada, but the lure of homeownership remains strong among those surveyed by Ipsos-Reid on behalf of RBC. An overwhelming 91 per cent of Canadian homeowners believe a home is a good investment. That’s the highest level of confidence in homeownership that the survey has seen in 12 years. This was the 17th annual RBC Homeownership study.
People aged 18 to 24 are most likely to buy in the next two years, says the survey. Most people who plan to buy are planning to take out a fixed-rate mortgage (44 per cent), although combination mortgages that include fixed- and variable-rate components are also popular at 40 per cent. Seventy per cent will take a mortgage term of five years or longer.
“Canadians seem to be opting for more caution this year and may be factoring in potential rate increases down the road,” says Marcia Moffat, RBC head of home equity financing. “Choosing a combination mortgage can take some of the guesswork out of making a decision between whether it is better to lock in to a longer term or stay in a variable rate.”
Moffat says that “the expectation of higher mortgage rates on the horizon could be motivating buying intentions this year.”
Low mortgage rates continue to fuel the real estate market, but the survey found that 64 per cent of respondents believe that rates will be higher in one year’s time. They are expected to start rising gradually at the end of 2010 and into 2011, but will probably still be near historic lows.
Are prices rising at an out-of-control rate? A recent report by Canada Mortgage and Housing Corp. (CMHC) says that house price increases have not necessarily been as dramatic as they seem in some media reports. “To a large extent, price gains in 2009 reflected a rebound back to levels that prevailed prior to the economic downturn. In particular, measured from the fourth quarter of 2007 to the fourth quarter of 2009, home prices rose 6.5 per cent. This translates to an average annual rate of price growth of less than 3.5 per cent over this period, which is not out of line with average historical rates,” says CMHC.
Many of the media reports rely on average MLS prices as a measure of price increases, but CMHC notes that these numbers are skewed when there’s been a lot of activity in higher price ranges in the most expensive markets in B.C. and Ontario.
Alternative price indexes that take the fluctuations of average house prices into account “strongly suggest that recent developments in home prices have been much less volatile than indicated by average MLS price changes,” says CMHC. “Analysis by the International Monetary Fund (IMF) also suggests that national house prices in Canada are supported by long-term fundamentals.”
Another recent IMF report says that prices are “essentially at long-term equilibrium values,” says CMHC.
Factors expected to cool the housing market going forward include an increase in the number of homes for sale as more listings come on the market; the introduction of Harmonized Sales Tax in Ontario and B.C, which will add new taxes to the cost of buying a home; and new mortgage rules that require some buyers to have a larger down payment to qualify for a mortgage.
RBC says first-time buyers should lock in their interest rate when they apply for a mortgage to avoid the expected increases. It says buyers should “stress test” their mortgage, by figuring out what payments would be required if rates rise, and then determining if the home they want is affordable at that level. Buyers should leave some “wiggle room” to ensure they can comfortably afford their mortgage while enjoying the lifestyle they want.
For homeowners who are renewing their mortgages, RBC suggests taking advantage of early renewal options that lock in the new mortgage rate. Sixty-three per cent of those surveyed said they are taking advantage of low interest rates to pay down more principal on their mortgages. Eighteen per cent used a lump sum payment to pay down their mortgage and 16 per cent were able to double up a mortgage payment.
by Jim Adair