You've probably heard a lot about how Canada is entering a "buyer's market" for real estate and, yes, it has become quite clear that we are. However, what is not so clear is what a buyer's market really is, and what buyers and sellers can do to navigate these new conditions.
Essentially, we were experiencing a "seller's market" for quite some time, meaning that prices were continuously going up and, if homeowners chose to sell, they were getting quite some bang for their buck — primarily because houses were rapidly increasing in value. This was happening because demand had exceeded supply, leading to bidding wars and increased prices.
However, as new rules and regulations came in to the picture, along with a bump in rates, market conditions began to change.
Now, we have entered a buyer's market, meaning there are more listings and fewer buyers. So, to put it bluntly, it all comes down to a simple matter of supply and demand. Supply is in abundance and demand is low because of recent government intervention — starting last October, when federal Finance Minister Bill Morneau announced several new regulations aimed at ensuring that Canadian borrowers only take on mortgages they can afford compounded by the introduction of the Ontario's Fair Housing Plan, which further put a dent in the Toronto market in particular.
These regulation changes along with the recent rate increase have left buyers wondering if they should buy in a market that seems to be going down faster than it went up, or wait it out.
Due to the market being in this "active" adjustment period, there is still room for further pricing correction, especially because government bond yields have gone up, which also means the stress-test rate — a way of determining exactly how much you can afford and under what circumstances — has increased, as well as the prime rate.
Previous stress test rate: 4.64 per cent
Current: 4.84 per cent
Previous Bank of Canada (BoC) rate: 2.70 per cent
Current: 2.95 per cent
So, what does this mean for buyers and sellers? First of all, it means that people are now able to come in and purchase — depending on their situation.
There is a little more wiggle room for those who are looking to negotiate.
Tightened regulations are expected to reduce the number of first-time buyers who qualify for mortgage financing, particularly in pricier markets. This leaves the door open to those who are eligible to purchase.
There is also more room to negotiate as expectations shift.
Everyone is aware of the pressure that the recent rules and rate changes have placed on the market, meaning there is a little more wiggle room for those who are looking to negotiate.
Now, the important part: What can you do if you're looking to purchase in this market?
You can start by making sure you have enough of a down payment — five per cent is the requirement for for most homes, and 20 per cent is ideal to avoid the hefty CMHC premium. This is especially applicable to those who are self-employed, have blemished credit or those who are buying rural (sometimes 35 per cent). If you don't fall into any of those categories, it's more of a recommendation, but one worth considering.
Also, make sure you are aware of and understand the additional fees, and that you have them covered. These include a legal fee, a broker fee and closing costs (including land transfer taxes and any other fees relevant to your situation).
Buyers are now getting back to protecting themselves by ordering an inspection and requesting an appropriate amount of days to arrange financing.
Brokers will typically only charge on an alternative mortgage because commission is minimal due to the term being short. The term is short because the hope is to get the home buyer or owner back into the A side — a mortgage with an "A" lender at preferred rate — once they fix their credit or begin to show more income on their tax returns.
It's also worth mentioning that this market reduces the risk for home buyers to lose their deposit, because they are not pressured into waiving all their conditions, especially on financing terms. Indeed, after the "wild west" of the past few years, buyers are now getting back to protecting themselves by ordering an inspection and requesting an appropriate amount of days to arrange financing.
That said, some lenders are not mortgaging properties that have price tickets over $1 million — even if the requested mortgage amount is less than that. As such, it's important to speak to your mortgage broker first to determine your eligibility before you jump in.
For sellers, it's important to be realistic
If you have just bought, you may not be in luck as your home will not continue to increase in value the way you may have predicted. But if you have been in your home for a while you will be better off.
Those trying to sell very expensive houses have been and will continue to be impacted the most. They're simply not being picked up — leading to rapid decreases in geographically specific areas, which may cause a trickle-down effect especially because many banks will not lend on properties listed over a $1 million.
While the goal posts have certainly changed, those looking to purchase a home — and those looking to sell — will still be able to accomplish what they want.
What's more, when pricing your property, you now have to keep in mind that an appraisal could compromise the buyer's ability to secure financing. If a buyer and seller agree on a price, the value has to be approved by the appraiser, who follows the guidelines of the lender.
What does this mean for the seller? If you price too high and are lucky enough to have someone buy the property, the transaction still may not close if the buyer is not able to pay the difference between the purchase price and the appraised value.
If you're unsure of the ins and outs of the new rules, make sure to do your research and reach out to your mortgage broker with any questions you may have. There is no such thing as a dumb question when it comes to buying or selling your home.
All in all, the laws of supply and demand will continue to prevail. While the goal posts have certainly changed with respect to the real-estate game, those looking to purchase a home — and those looking to sell — will still be able to accomplish what they want and need to do.
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