The average Canadian home value fell 1.2% in June. It was the first drop of 2010.
There’s one thing about price declines: They’re good at making people ask: “Now what?”
The answer is pure speculation, as usual, because housing—like the economy, interest rates, and the weather—can’t be predicted long term.
Nonetheless, while one month does not a trend make, there is a somewhat bearish tone in real estate these days. Below are the latest assessments from some well-known observers…
“With interest rates on the rise, housing affordability and home sales activity are expected to continue to erode over the second half of 2010.” – Gregory Klump, chief economist, Canadian Real Estate Association
"An expected increase in the supply of homes on the market will now bring stabilization in prices, and in some cities we will see both prices and unit sales decline towards the end of the year.” — Phil Soper, president and chief executive, Royal LePage Real Estate Services
“As we cross into the second half of the year, we expect to see a continued easing in activity.” – TD senior economist, Pascal Gauthier
“…excesses in one direction are generally followed by excesses in the other direction…In a nutshell, there's more air to come out of this Canadian housing balloon.” — Gluskin Sheff + Associates Inc., economist, David Rosenberg
Few analysts predict an outright crash, though. Most are calling on a strengthening economy and employment to pad the fall. But again, it’s all speculation based on future uncertainty.
That uncertainty is prompting some first-time homebuyers to think extra long about their buying decision. In the last few months, we’ve come across a fair number of home buyers who are hesitant to buy because they expect prices to fall.
CIBC, for example, expects a 5-10% drop by summer 2011. Suppose, for illustrative purposes, we averaged that to a drop of 7.5%. If the economy continues its recovery and fixed rates rise 1%, the mortgage picture could pan out something like this (these aren’t predictions, just a hypothetical):
Thus, a person looking to buy an average house in this scenario pays $74 more a month by waiting a year to buy, but saves $25,700 on the price.
Mind you, you have to adjust for rent expense (people need to live somewhere while they’re waiting to buy), property taxes, etc. But still, someone could easily make an argument that waiting to buy is the most economical decision in certain real estate markets—even if rates go up.
This isn’t meant to scare people from buying homes. But if you’re looking to buy with only 5% down, it should make you think a bit. People with little equity need to have a long-term time horizon and solid employment prospects, because real estate risk has undeniably increased.