When should you jump into the housing market?

So the Bank of Canada (BoC) announced on March 6’24 that interest rates will remain unchanged.  This decision was widely expected by the finance community.  However, regardless of how smart Bay St prognosticators think they are – that doesn’t help the average Canadian house buyer.

There is much to consider when deciding whether or not to buy a house now. Interest rates, housing prices, the economy, unknown exogenous financial events. I subscribe to the theory that one should quantify the risks then ask themselves if they can still sleep at night. If so, move ahead with your decision.  Alternatively, if you don’t understand – or can’t accept – the risks, go for plan B (assuming you have a plan b).

Risks abound: Your new house price could fall, interest rates could rise (increasing variable payments) or you could get locked in to an interest rate while others are enjoying lower falling rates.  The risks with house purchases are fuel for exaggerated media headlines. 

Falling Housing Prices
Over the past 25 years Toronto housing prices have gone straight up – 457% up since 1996 (according to Re/Max Canada).  Sure, housing prices can rise and fall year to year. But unless you are flipping houses for a living then presumably you’ll stay in your house for at least 10 years  – so yearly fluctuations are irrelevant.

Interest Rates
The days of 1.5% mortgage rates are still vivid memories in our mental photo albums – but let’s be clear, they were abnormal years.  Average normal interest rates are usually higher than what we’ve experienced previously.  Higher rates (higher than 1.5%) are here to stay.  So if you need to adjust your budget because of larger interest payments then your budget is simply normalizing.

There is a low likelihood that rates will increase at this point. The most probable scenario is that rates stay where they are – possibly falling in September. If you are trying to time interest rates, you’re allowing the economy to dictate the course of your life.  

Risk Based Analysis
Another perspective is to make an informed decision that incorporates all economic data, quantify the risks, then adjust your budget accordingly.  If you want to buy a house now, and rates are where they are, then your budget will have to accommodate this decision. Easier said than done, I know. But if you have to cut back in one area of spending that is not as critical as shelter, then you’ve got a plan.

House prices vs Interest Rates
An economist would view the question of when to buy a house using the following comparison:

  • Does one buy when housing prices are low but interest rates are high, or
  • Does one wait for rates to fall, but then buy a house at a higher price

If you believe that house values will appreciate faster than interest rates will fall, you want to buy now.  If you are uncomfortable making higher payments (because of high interest) even though you know you’ll pay more for a house if you wait, then you should wait. You need to be able to sleep at night. There is no right or wrong choice, there is simply the choice that is best for you and your comfort level.  

In the end, we cannot predict what the economy (or life in general) will throw at us.  If one vacillates due to fear of the unknown, they may risk losing the opportunity to move their life in a direction that brings them joy. Every decision has a risk.  We combat the risk of the unknown by quantifying it, then preparing ourselves for surprises.  A nest egg here, prudent analysis there, the understanding that sacrifice of small pleasures equals the benefit of future savings. 

The architect Norman Foster said “You design for the present, with an awareness of the past, for a future which is essentially unknown”. 

Know your risk, plan the scenarios, take a measured leap and watch life happen.

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