The headlines are playing out in familiar patterns across Canada with the notion that homeownership is quickly slipping out of reach for many.
This is specially challenging for newcomers who hope to find a home within their budget, when currency from their home country often dwindles drastically on conversion into dollars.
At the same time, mortgage rates have continued to fall, with little indication that things will change significantly any time soon.
“Affordability is an interesting conundrum,” says Craig Blanchard, broker-owner with Royal LePage Atlantic Homestead in St. John’s, Newfoundland. “While home prices have risen sharply in some of Canada’s largest urban markets, it’s now cheaper to carry a mortgage than it was 25 years ago.”
One of the most relied upon indicators of affordability comes in the monthly release of the Consumer Price Index (CPI) from Statistics Canada. The CPI measures cost of living in Canada, which is based on year-over-year pricing data collected on a set basket of goods. Depending upon whether or not that basket of goods has risen above the 2 per cent mark – the benchmark for Bank of Canada’s overall inflation rate – a rise or reduction in the prime lending rate can ensue. The cost of carrying a mortgage is part of the CPI equation and directly plays into the lending rates established by the banking industry.
Although home prices have increased significantly in some markets, the typical mortgage interest costs have declined by over 7 per cent between June of 2010 and June of 2015, and by 1 per cent since January 1990.
A lot of attention is paid these days to the rising costs of home ownership. Then again, as Blanchard points out, home prices across Canada vary considerably. What happens in Canada’s major markets over short periods will most certainly affect the headlines. In the end, affordability is based on your individual financial picture and local and personal economic factors within the location of your choice.
A glance at home prices across Canada
With much attention to home prices these days, property owners are increasingly curious about the value of their homes.
According to the Royal LePage House Price Survey, Canada’s residential real estate market showed strong year-over-year price increases in the first quarter of 2016. The Greater Vancouver and Greater Toronto Area (GTA) real estate markets continue to lead the country in home price appreciation while Quebec shows promising signs of renewal, particularly in the Greater Montreal Area.
The median price of a home in Canada increased 7.9 per cent year-over-year to $512,621 in the first quarter of 2016. The price of a two-storey home rose 9.2 per cent year-over-year to $629,177, and the price of a bungalow increased 6.8 per cent to $426,216. During the same period, the price of a condominium increased 4 per cent to $344,491.
“A glance at our national House Price Composite points to a very strong Canadian real estate market, yet the findings contain extreme regional disparities of the kind we haven’t seen in over a decade,” said Phil Soper, President and CEO, Royal LePage. “Like an economic triumvirate, the impact of rock-bottom interest rates, the low Canadian dollar and a rapidly expanding US workforce are stimulating economic growth and housing demand in our largest metropolitan areas. Conversely in cities like Calgary, the ongoing drags in depressed energy prices and worrisome employment trends have taken a material bite out of sales volumes.”
To view the chart with aggregated regions and markets, visit royallepage.ca/houseprices. This site provides historical house price data as well.
How much do you need for a down payment?
When buying property, the amount that you decide for your down payment depends upon your specific financial situation. Generally, the more you put down, the lower your monthly payments will be.
However, it is also important to consider the kind of mortgage you are willing to take on, according to Ray Ferris, President of the Ontario Real Estate Association.
“It really comes down to what you can afford, but also your comfort level,” Ferris explains. “Are you prepared to take on a conventional mortgage, or is a high-ratio mortgage more realistic? That’s something you'll need to work out.”
Here is the difference:
Conventional mortgage: Your down payment is 20 per cent of the purchase price or more.
High-ratio mortgage: Your down payment is less than 20 per cent of the purchase price.
As of February 15, 2016, the minimum down payment for a new mortgage has been modified.
The new requirements are as follows:
• For homes with a purchase price less than or equal to $500,000, the minimum down payment is 5 per cent;
• For homes with a purchase price greater than $500,000 and less than $1 million, the minimum down payment is 5 per cent of the first $500,000, plus 10 per cent of the remaining balance;
• For homes with a purchase price of $1 million or more, the minimum down payment is 20 per cent.
“High ratio mortgages must be insured by a mortgage insurer, and you will be required to pay the premium for this insurance,” adds Ferris. “Your realtor will be familiar with all of these rules, so be sure to discuss with them.”
Know the difference between a down payment and a deposit
They both start with the letter ‘d’, and they both require a large sum of money to secure the purchase of a home. However, a ‘deposit’ and ‘down payment’ are very different.
“A lot of my first-time home buying clients ask me what the difference between a deposit and down payment is,” says Ray Ferris, president of the Ontario Real Estate Association (OREA). “Simply put: a deposit is associated with your offer to purchase a home, while the down payment is associated with your mortgage. The deposit will go toward the down payment.”
Here is more information to help you decide how much to contribute to each:
Deposit. When you submit an offer, normally you are requested to include a deposit to demonstrate a serious intent to buy the property. This deposit will usually be in the form of a cheque, payable to the listing broker, who will place it in a trust account until the deal is completed or terminated. Your deposit provides the seller with some assurance that you will go through with the sale when the day of completion arrives.
When an agreement is reached and the transaction is completed, the deposit will be credited in full towards the purchase price. There is no standard amount for a deposit, but the size of it says something about how serious you are about buying. Your Realtor can help you figure out the right amount to offer.
Down payment. This is the money that you pay at the time of purchase toward the price of your home. Your mortgage loan covers the rest.
How much you contribute as down payment depends upon your specific financial situation.
The more you put down, the lower your monthly payments will be.
But before you contribute every penny you have to the down payment, set aside a cash reserve for other costs, including legal fees, land transfer taxes, closing costs, moving expenses, and any improvements or renovations you plan to make in your new home shortly after you move in.
– News Canada