It’s a tough time to be a first-time home buyer in Toronto. Toronto’s eleven year real estate boom has left many first time buyers feeling a little anxious about buying their first home. Much of their anxiety has to do with not knowing when the real estate market will reach its peak.
Many home buyers find themselves faced with the following dilemma. If they buy today and the market drops shortly after they purchase, their home may begin to decrease in value. On the other hand, should they decide to hold off on buying and the market continues to appreciate over the next couple of years, prices may be out of reach for them when they eventually decide to buy. Will they be buying at a peak at that time?
The most important thing first-time buyers should be aware of is that the right answer to this question has as much to do with the economy as it does their own personal circumstances. What’s right for one person might not be right for another.
The Economy and the Real Estate Market
There is little doubt that the real estate market will eventually level off or decline. The key unanswered questions are when is the market going to slow down and by how much?
Every home buyer should invest the time to understand what economists are saying about Toronto’s real estate market. You don’t need to understand every detail, just listen to what’s being said and ask questions if something doesn’t make sense (ask your realtor, ask your colleagues, ask us). News services like Google News (news.google.ca) make it easy to find the news that’s important to you. Customize your Google News page to display articles that discuss Toronto real estate, Toronto condominiums, Toronto neighbourhoods or any other topic that’s of interest to you.
While it’s important to read economic reports that discuss Toronto’s real estate market, don’t read too much into any one report. In April 2006, TD Bank published a report indicating that the Toronto real estate market had reached a “soft landing." The key question for TD was “will this soft landing continue or is the market still prone to major price declines?” Toronto’s record-breaking sales in 2007 are proof that even the pros can miss the mark sometimes.
More recently, the outlook for 2008 is for a general economic slowdown in the market but continued appreciation in house values. Economists see homes appreciating in the single digit rather than double digit range for 2008. A drop in interest rates would make home buying more affordable and further support the positive outlook for Toronto’s real estate market.
Your personal circumstances are going to play an important role in your decision making process.
- How much do you have saved up for a down payment?
- If you buy, how long do you plan on living in the home?
- If the market isn’t doing well when you plan to sell, would you be able to stay longer?
The longer you are willing to live in your home, the less vulnerable you are to short term dips in the real estate market. Home buyers who are buying for the long term are giving more time for their home to appreciate in value and to recover from any short term dips.
Furthermore, the more money a home owner has invested in their home, the more comfortably they can manage a situation where they have to sell their home at a small loss. Home buyers buying with no money down may have very little equity in their home to cover such losses.
Pulling it all together
Home buyers who plan on living in their home for the long term (10 to 15 years) are in a good position to purchase in today’s market. While we don’t know where real estate prices will be in the future, a long time frame should give you enough time to recover from any dips in the real estate market and to accumulate enough equity (by paying down your mortgage) to make buying a home a smart decision.
Individuals planning on living in their home for a short period of time (less than 5 years) face greater risks than long term buyers. Should homes drop in value in the next five years, short term buyers are giving themselves less time to recover from any decrease. Short term buyers are also giving themselves less time to recoup the costs of buying and selling their home. The fixed costs of buying and selling your home (legal fees, land transfer taxes, real estate fees, etc.) could run as high as 7-8% of your home’s value. Assuming that we agree with the forecasts that suggest home prices will continue to rise this year, home buying remains a serious option for the short term buyer who may benefit from an immediate appreciation in their homes value. Had forecasts called for no appreciation in house prices, the risks of buying for the short term would have been greater.
Deciding whether or not to buy has as much to do with your personal circumstances as it does the economy. First understand what your goals and expectations are for your home purchase, then consider what’s going on with the economy. This should help bring you closer to an answer that is right for you.