Is it more profitable to buy or to remain a tenant? That's the question on the lips of every renter who is considering becoming a homeowner. And what is the reason for the current housing market, where property values continue to rise? Moreover, should we be concerned about an increase in interest rates if inflation takes hold?
According to Hugo Neveu, mortgage broker and senior partner at CONSORTIUM Hypothécaire and vice-president, mergers and acquisitions, for Synex Performance d'affaires, buying a property, as a rule, is a good deal. To demonstrate this, he conducted a hypothetical comparison between a new owner with a 5% down payment and a $200,000 mortgage with a monthly payment of $1,600 on the one hand, and a tenant with a $1,000 rent who would invest the difference between the rent and the monthly mortgage payment, or $600, on the other.
In the first two and three years, the tenant who invested the $600 would come out ahead, as his or her investment would increase faster than the value of the property," explains Hugo Neveu. But then the opposite happens, and the landlord has the advantage, because the property has continued to increase in value and the mortgage balance has decreased. Basically, what is not advisable is to buy a property with a small down payment in the hopes of selling it quickly for a profit. That's where the financial risk lies.
A hot market
The Canadian Real Estate Association (CREA) estimates that the national price of a home in 2021 will be $680,000, an increase of almost 20% over last year. We are in a seller's market, since supply is not sufficient to meet demand, hence the increase in the value of properties available on the market," explains Hugo Neveu.
Did the pandemic play a role? Certainly," maintains Hugo Neveu. People were confined to their homes, and telecommuting became widespread. Many tenants made the decision to find a home better suited to their new needs and entered the real estate market."
20 %
That's the increase in the price of a house in Canada, compared to last year
Another interesting figure is the increase in the number of mortgages in Canada, a jump of about 42% between 2020 and 2021. Nearly one-third of this jump is due to mortgage refinancing," says Hugo Neveu. With low interest rates and mortgage refinancing based on the current market value of the property, many homeowners have refinanced their mortgages, freeing up cash to invest, often in renovating the property. Here, too, the pandemic came into play."
Another factor in the supply shortage has to do with the behavior of baby boomers. "In the early 2010s, it was expected that baby boomers would mostly sell their single-family residences and then move into a condominium or townhouse. But it didn't happen that way, and many of these homes never went on the market, reducing supply. My hypothesis is that it will be the grandchildren of these baby boomers who will benefit from these homes coming on the market."
Rising interest rates?
For now, interest rates remain low, but inflation is showing its face. Economists believe that inflation is temporary, caused mainly by the pandemic, but if it persists, central banks will have no choice but to raise the policy rate. Should current or future homeowners be concerned about rising mortgage rates?
Not really," says Hugo Neveu. On the one hand, it would take three successive quarter-point increases in the key rate to see a tightening of access to credit, and on the other hand, an increase in the interest rate would have no impact on holders of fixed-rate mortgages before the end of their mortgage contract." What about variable rate mortgages? "They would be affected by the increase in interest, but most lending institutions will choose not to increase the monthly payment, preferring to allocate more to interest. So the monthly payment stays the same, but it takes longer to pay off the principal."
Source : Article by Pierre Vallée on the website 24heures.ca on the 6 November of 2021
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