Three important questions facing the GTA housing market this year
As I predicted last year, our paradigm has shifted due to the government intervention of the stress test as interest rates increased. In a nutshell, the GTA real estate market has since slowed on both the buying and selling sides. All but condo prices have slowed. There is a high demand for the smaller properties, and it appears that first-time homeowners are grasping at the cheapest properties they can get.
There are still three big questions that will determine the playing field for 2019.
1. Where are interest rates going?
The answer is not so simple. In fact, it is almost impossible to answer. Interest rates are the product of the Bank of Canada lending rate, and the BoC determines the lending rate based on the economy. To figure out the economy is like trying to figure out a lock combination with a million different variables. My advice is to play it safe, and if you take a risk, make it a calculated one. I always use the inflation rate for appreciation and worst-case scenarios with my clients.
2. Will the federal government reconsider the stress test?
The stress test was introduced to prevent homebuyers from defaulting on their mortgages in case of an interest rate hike.
Since the stress test was introduced, the real estate market has slowed substantially due to qualification and affordability. This type of government intervention shouldn’t be taken lightly. Although the test was implemented in good faith, the government should have put some measures in place before implementing such a heavy-handed rule. Let me explain why.
Say the stress test was set up when the interest rate was in the low two-per-cent range. The stress test would mean that the qualifying rate was slightly more than four per cent at that time. Fast forward approximately 12 months and at least five interest rate hikes, and we are at a qualifying rate of slightly more than six per cent. Now the same person who qualified a year ago, will have a much lower borrowing power.
Who does this hurt? For starters, buyers who purchased pre-construction and are looking to close in the near future. The original pre-approval they once obtained is no longer valid, and if they can’t borrow the difference or get a co-signer, they won’t be able to close. As a real estate broker, I always warn my clients against such situations, as well as the potential reward if done right.
3. Where is 2019 headed?
Uncertainty is still the driver, but it’s safe to say this is our new normal. Last year, it was pretty shocking for everyone who got caught in the middle of all these new rules and rate hikes. Sellers were refusing to realize price drops, and every few weeks they would slowly introduce a price reduction.
Buyers experienced a harsh reality and were forced to revisit expectations. Although prices dropped, so did borrowing power, which led buyers to go back to renting and attempt to save some more or, as mentioned, lower expectations and purchase the next best property they can afford to get into homeownership.
There are still those who are waiting to close on a purchase and will have to come up with the difference, get a co-signer or go to a B lender and pay higher interest. However, as the dust settles, buyers are finding their confidence again. Sellers are being more realistic, and buyers also have a more practical approach.
Unless we keep seeing interest rate hikes, there is only one way to go, and that is up – as long as the government re-visits the stress test and configures it to adapt to the ever-changing interest rate environment.
ARIE BUZILO is a real estate broker and an investor specializing in buying and selling properties all over the GTA. He works out of Century 21 Leading Edge Realty.