Renters and the Rate Influence

Rent-vs-BuyMore than 1 in 4 renters (~28%) are planning to buy a home in the next two years—according to a recent study commissioned by The Mortgage Group (TMG).

TMG’s president, Mark Kerzner, said that could translate into about 12% growth in homeownership.

Of those surveyed, more than half (54%) said they would likely buy sooner if they expected interest rates to rise 2% or more in the next year.

This buy-before-rates-go-up philosophy is not surprising. A two percent rate increase would cost a borrower over $30,000 more on a 5-year fixed mortgage (assuming an average priced home, 10% down and a 25-year amortization).

While the fear of future rate hikes often drives consumer psychology, a budding homebuyer may also want to consider the:

  • Size of his or her downpayment and emergency fund (there’s nothing like the stress of being house poor)
  • The likelihood of rates increasing anytime soon (If they don’t, as many expect, it permits more time to save for one’s down payment and closing costs.)
  • The possibility that home prices will fall or rise further in two years (e.g.  a 10% price drop could potentially offset the benefit of buying before a 2% rate hike)

Going back to the above-referenced study, TMG’s report had some other notable stats as well:

  • 68% of renters said they intend to get their information about mortgages from a mortgage broker, while slightly less (66%) said they would contact their bank.
  • 34% ranked flexibility as the most important factor in choosing a mortgage, while 33% said getting the lowest possible rate is most important to them.
  • 91% of renters planning on buying would use a mortgage broker. “Buyers recognize mortgage brokers provide a fast, efficient way to access a wide variety of mortgage options and solutions, in most cases at no additional cost,” Kerzner said.
  • 79% of renters planning on purchasing consider themselves educated in the buying process and said they are aware of being able to access their RRSPs as part of their down payment.

Steve Huebl, CMT

 

  1. Wow, was I ever wrong! I thought, with home ownership rates already up at 70%, we’d more or less reached the limit; the remaining 30% were either too poor or unsuited for homeownership.
    Turns out much of the remaining 30% has their RRSPs all topped up ready to tap, need flexibility (to crank up their prepayments, or move up to their second property in less than 5 years?), and are even more likely to use a mortgage broker than the 70% who already own! Boy, did I read that wrong.
    If this is all true, sounds like a bad time to be a landlord.

  2. It’s most certainly a bad time to be a landlord for different reasons: prices are so high and rents comparably so low that it’s impossible to run a cash flow positive property.
    Rents have to skyrocket or prices have to fall to make this marker make sense again.
    I wouldn’t bet on skyrocketing rents — rent have been rising less than inflation (substantially) for more than a decade.
    Let’s see how many of those renters change their tune once the market starts to correct.

  3. More than 1 in 4 renters (~28%) are planning to buy a home in the next two years—according to a recent study commissioned by The Mortgage Group
    I wonder how this number compares longitudinally, i.e. how often do these plans / intentions actually result in home-buying?

  4. Just noticed a relevant link posted by Rob on Twitter:
    http://t.co/f9pC75hc
    ^Industry Canada’s buy calculator based on rent.
    If those renters rant hat calculator, or even the “Rent Translator” on ING’s site, they’d never bother to buy.

  5. Surveys can be useful but should be taken with caution.
    Last year the market already sucked in the bulk of investors who at that time were undecided or waiting for a good mortgage deal. This was due to new rules effective March 18 2011. Remember at that time nobody assumed rates would be lower so this was a ‘now or never’ moment.
    In the chart below you can see how the trend was broken in terms of number of mortgages that resulted in an eight year high above average. In technical analysis, when an organic trend is broken by this amount, implies some other factors are at play. This was the rush to beat the deadline.
    http://i40.tinypic.com/zx8mbp.png
    The next chart below is charted from The Bank of Canada’s monthly financial report that contains all residential mortgage credit (including MBS) held by chartered banks and other institutions. The chart is indexed on a percentage basis showing the relative yearly performance from Jan-Feb. Again we see the March peak reaching the second highest level in eight years followed by a winding down into the summer and rising again toward the end of the year. In contrary to a record number of monthly mortgages, the overall rate of growth did not exceed any year before 2008 (including 2009-2010).
    http://i39.tinypic.com/68g5sg.png
    So even with record low rates we are seeing poor performance in terms of credit growth, including the fact that lenders have been streamlining low-income individuals. The market has now exhausted undecided investors, fast track immigrants and self employed workers. Who else can carry the next boom when Canadian student loan debt now stands at $27,000?

  6. There is a big gap between the people who are planning to buy a home and the people who will actually buy a home.
    Many people want to quit smoking or travel the world but few will do.
    Those 28% renters want to onw their homes but most of them will need to save for the downpayment first and wait till the housing bubble deflates a bit. It is not a pleasant feeling when your property value goes down wiping out your downpayment and equity when the majority of your early mortgage payments are just serving the debt.

  7. Dizzle, I gaurantee you that the the bears partying at Church & Wellesley are having more fun than these folks yelling at each other.

  8. “More than 1 in 4 renters (~28%) are planning to buy a home in the next two years”
    So accounting for the number of new renters of about 1% every year (approx overall pop’n growth), there will be no renters left in about 8 years. Then what?

  9. Everyone will have a million dollars in home equity that they can borrow against, silly. And all those apartment buildings at Yonge and Eg will be vacant, so they’ll have to drop their rental rates to $10/mo, and it will still make more sense to buy because if you don’t you won’t be building valuable home equity and you’ll be paying your landlord’s mortgage FOREVER. CMHC will have their lending limit raised to a gajillion dollars because the government would never put canadians and the economy at risk, and interest rates will be negative because saving is for fools and bad for the economy. Now go back to your silly cave and borrow more from your HELOC at less than inflation.

  10. I currently own a studio rental suite as an investment property with a current monthly rental revenue of $1340. My strategy has always been to purchase small properties in good areas so any perspective tenants would find it difficult to purchase a similar suite that would carry (mortgage, property taxes and maintenance)for the same or less than the rent that I charge. In the case of my rental property a purchaser would have to have a downpayment of approximately $70,000 in order to have the same carrying costs that are equal to mine. If tenants become owners at a fast pace would that not put upward pressure on selling prices and not produce a price correction like so many “experts” have predicted?

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