Home owners and buyers are going to need an attitude adjustment as rationality seeps back into the country's hottest real estate market.
The Ontario government has introduced measures to restrain housing price surges that last month came in around 30 per cent in Toronto and nearby Hamilton. We could see prices stagnate or decline in the months ahead, but a crash is unlikely for now.
Housing markets have two arch enemies – rising unemployment and rising interest rates. Neither is a threat right now. Unemployment numbers have been quite good lately, though wage growth has been stagnant. And while pressure was building in financial markets not too long ago for a small mortgage rate increase, the threat has lately evaporated. As ever, there's no conviction that the economy is strong enough to justify a return to more normal borrowing costs.
Let's take a look at how buyers and owners should position themselves for the market conditions ahead. The point of the measures announced by Ontario's government is to shut down the speculative frenzy that has been driving house prices up at rates vastly ahead of both wage and economic growth.
This should ease the pressure on first-time buyers who feel they must venture into an unaffordable market before they're permanently priced out. Take a break, first-timers. Wait and see how the new measures affect prices and bidding wars. If the gold rush in housing isn't over, expect more action from government.
So much for the everyday homeowner's investment rationale for jumping into the market. Governments will not permit prices to keep rising like they have been because of the risk of a messy market crash that affects the national economy, not just Ontario. Buy a house because you love it and it fits your budget and family. There is zero chance the house you buy today will be worth 30 per cent more in April 2018.
First-time buyers should also understand that governments are unwilling to enhance the already substantial number of supports available to them. Expect no additional property tax rebates, tax breaks or encouragement to maim your registered retirement savings plan by using the federal Home Buyers' Plan. These measures stoke demand for housing, which is the last thing Canada's hottest real estate market needs.
The best way for buyers to protect themselves against any price declines to come is to remain in a house they buy for at least five to 10 years, which should bridge us to the next upswing in housing. The purchase of a starter home makes no sense if you'll outgrow it in short order and want to sell.
Heavily indebted home owners need to consider the impact of Ontario's measures as well. Lots of them have been able to stay afloat financially by tapping into the rising equity in their homes. If home prices move sideways or fall, this relief valve is closed. See a financial planner or debt counsellor if you're worried about this.
Boomers who plan to cash out of hot markets in southern Ontario and buy elsewhere, what are you waiting for? You might end up leaving money on the table if prices keep rising, but that's the price of locking in a great price today and eliminating your exposure to a market decline.
Downsizing within a hot market is problematic today because there's often not much money left over after moving to bungalows, townhomes and condos. A more rational real estate market might break this impasse. There could be less demand for condos, for example, if more people can afford houses.
A re-think of buying real estate strictly as an investment is also called for as a result of Ontario's steps to reduce speculation in the housing market. One of the clearest signs of a housing bubble in the Toronto area is the number of pitches being made these days by people who show others how to get rich in real estate. People have, no question, made amazing money speculating in real estate in the past few years.
But the Ontario government is pretty clear in wanting this to stop. If housing were the stock market, the smartest investors would be taking profits rather than buying more. That's how they build up money to pick up bargains in the next market dip.