"Low priced entry-level housing will be affected most by this mortgage rule change. We anticipate a price drop in the below $300,000 market of about 8% as a result of this mortgage rule change.Houses valued at or above $450,000 should experience little downward pressure while houses priced over $700,000 will experience none.A faster growing job market in Calgary and Alberta should lessen the impacts of this policy on the local economy."
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Posted in: Buying a Home In Calgary , Market Trends , Mortgages , Property Virgins , Selling a Home In Calgary
Wow, my blog and Twitter posts on the forecasted effects of the new mortgage rules created the highest amount of feedback yet - albeit quite negative from other agents who felt I was forecasting "doom and gloom" that would drastically reduce sales for the next several months. One stated, "How dare I cause fear?" I countered, that I did no such thing. I merely posted the fact-based research and forecast that the City of Calgary had completed in regards to the impact of the new mortgage rules on a LOCAL housing basis. In fact, it is quite the opposite. Read on...
On a national basis, almost every economist is forecasting a ten to 15 percent price correction (price drop) - on average - over the next two years. That isn't particularly rosy, but based on the over-inflated prices in Vancouver and the super-hot condo market in Toronto, this makes total sense. Those two cities, alone, make up a significant number of the total sales in the country.
Locally, the City of Calgary report said the impact over the next two years should be:
Obviously for buyers considering buying homes above the $450,000 price range, this is a no brainer. The prices of these homes should experience little downward pressure. If anything, the prices will just stabilize due to the continued demand on homes because of the growing economy. They shouldn't fall. Go ahead buy today. Two years from now interest rates are most likely be at least 1.5% to 2% higher than they are today based on most economists forecasts. This will substantially impact the size of home you can purchase.
For buyers looking at entry-level home purchases (homes priced below $300,000), we just need to do a little math to determine should we buy now or wait until the housing prices adjust downwards the 8% over the two years.
Let's assume we are considering purchasing a $300,000 home today with 5% down and 25-year amortization. Today's best 5-year, fixed mortgage interest rate is about 3.1%. In the next few weeks we may even see rates below three percent based on a consensus of local mortgage brokers. We probably won't see those rates for more than a month or so.
So first, let's calculate how much the home will be worth if, in fact, values drop by that 8%. That's $300,000 x 92% or $276,000 - two years from now. If we wait until then to buy the very same house, we'd be buying it for $276,000 with interest rates forecast to be 1.5% to 2% higher than they are today.
Okay, now let's assume we bought that house today for $300,000. The payments would be roughly $1,401 per month. At the end of the two years, we would have paid $33,622 which is made up of interest, mortgage default insurance and of course mortgage principal reduction. The outstanding mortgage amount would be... $276,787. And your mortgage interest rate will be at 3.1% for another 3 years!
So based on these rudimentary calculations, it makes sense to BUY TODAY and not wait!
The house will be worth roughly the same amount: In two years, if the values do drop (which they likely will), it will be worth $276,000. If you buy the house today and pay down the mortgage over the next two years, it will be worth $276,787. So it makes extremely little difference as to the value of the home. Then you must consider interest rates, which have been held artificially low due to economic uncertainty. Economists are forecasting that they will most likely be substantially higher two years from now. It clearly makes sense to buy that entry-level home today!
The homes priced in the range between $300,000 and $450,000 clearly will be somewhere between these two other ranges. So for all price ranges it makes sense to buy today and not wait.