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Is Now the Right Time to Buy a House?

Real estate agent handing over house keys with approved mortgage

Is Now the Right Time to Buy a House?

First-time homebuyers seem to think so, even if that means having to widen their purse strings.

That’s what a new BMO survey finds. The bank says 40 percent of first-time buyers now believe it’s a good time to buy.

Some are more optimistic than others, however. In Alberta, for example, more than half of first-time buyers think now is the time to jump into the real estate market.

Those in Quebec and Ontario are less optimistic, with just 40 percent and 33 percent feeling currently bullish, respectively.

But Can They Afford It?

Given that nearly half of new homebuyers want to purchase in one of Canada’s hotter housing markets—Vancouver, Toronto or Montreal—unaffordability is reality they must confront.

The data reveals roughly one in seven first-time buyers are planning to buy a property that would consume more than 30 per cent of their income. (That seems low to us given most first-timers brush against or exceed the traditional 32 percent gross debt service limit, but okay.)

Another 40 percent are willing to make sacrifices in order to afford a more expensive home.

Trivial question: How many Starbucks lattes do you not have to drink (assuming you drink them at all) to afford a 5% down payment on the average home? (answer below)

"While first-time homebuyers believe that market conditions are favourable for buyers, it's important to make sure that carrying the costs are sustainable," said Hassan Pirnia, BMO’s head of Personal Lending and Home Financing Products.

Freshman buyers are also placing some hope in the recently launched First-Time Home Buyer Incentive, a down payment assistance program promoted by the Canada Mortgage and Housing Corporation.

Despite criticism of the program and doubts about its ability to improve buying power, a surprising 86 percent of first-time buyers feel the subsidy will be “useful” in helping them achieve homeownership.

Falling Mortgage Rates Helping Affordability

Despite significantly higher prices in many housing markets, recent data shows affordability is improving.

One big reason? Falling mortgage rates, says National Bank. They’re easing the pain of higher home prices by making the monthly carrying costs easier to manage, assuming you can qualify.

For example, the best 5-year fixed mortgage rate found on RateSpy.com in August was 2.30%, 94 basis points lower than in January.

That difference works out to an interest savings for borrowers of $4,425, or $47.58 per month.

“Indeed, the free-fall in financing costs was the most substantial since (the third quarter of 2010),” wrote Matthieu Arseneau & Kyle Dahms, co-authors of National Bank of Canada’s Housing Affordability Measure.

But rate drops aren’t fuelling housing demand like the old days. The reason: the stress test. “…The qualifying rate declined only 15 basis points, meaning that most potential new buyers excluded by B-20 [stress test] measures still are.”

Down Payment Still a Challenge

While monthly mortgage payments are somewhat more affordable for many homeowners, the biggest obstacle for first-timers remains scrounging up the down payment for a purchase.

A minimum of five percent down is table stakes to be a homeowner. That’s a hefty lump sum for someone just out of school and/or saddled in student debt, particularly if they live in the country’s costliest housing markets.

Over a quarter (25 percent) of first-time buyers say even meeting the five percent minimum would be a chore, BMO reports.

Additionally, only 14 percent say they are already in a position to make a deposit, while the majority (55 percent) say they’ll require up to two years to piece together the funds they need.

Clearly, saving up for home #1 is easier said than done. That’s especially true given nearly two-thirds of new homebuyers are carrying other debts while they scrimp for a down payment.

Latte Factor trivia: Forgoing "just" 6,055 Starbucks latte’s will net you a 5% down payment on the average Canadian home (assuming you drink Grandes).