Four Factors to Consider When Buying a Home
Thinking of buying a home? Purchasing real estate is a sound investment with the strong market. But before you take the plunge, consider these tips.
Should you take a look at the residential real estate market as a whole, the trends are extremely positive, especially in the southern U.S. and some regional pockets in Canada. For instance, new housing sales rose in the U.S. by 18.5 per cent in June 2015 according to the US census bureau; 58.5 percent of which were in the south, according to the US National Association of Realtors.Additionally, the US Homebuilder Association confidence level in July 2015 (NAHB/ Wells Fargo) Housing Market Index is the highest since 2005.
North of the border we see strong, if not overheated real estate markets in downtown Montreal, Ottawa, Toronto and Vancouver and gradual slow- downs in western cities like Calgary. The current inflation index is staying consistently low in both Canada and the United States, and there seems to be no great catalyst for the banks to raise interest rates very much in the short term, so long as the longer term five-year rates are somewhere around three per cent.
This means that it’s unlikely in the current market to see catastrophic real estate fluctuations so long as the current market and economic catalysts stay neutral. North America is leading into a continuing steady growth in the residential housing market, but you should always monitor the increasing regional real estate markets to assess risks accordingly.
What to watch for
I always advise my clients to watch for times of upheaval such as geopolitical situations or severe market crashes such as what was experienced in 2008. Many of my Canadian and international clients were buying properties in the U.S. after 2008/2009, especially in Florida and the south and southeastern United States. There are differences in the Canadian dollar to the U.S. Greenback, which present benefits to the U.S. buyer that are hard to miss in any of Canada's markets.
Examining secondary urban real estate markets in heated regional markets has yielded strong returns for some clients both in Canada and the United States. But is real estate a great asset class in this point of the cycle? If you are buying a house and expecting the appreciation to be as robust as it was in Toronto for the past 17 years, this is the wrong time for those kinds of return expectations. The cost of both owning and buying a home is expensive with taxes, land transfer costs and Realtor fees of three or five per cent, as well as upkeep.
All this considered, most regions have increased sales during the year to date as of June 2015. Some regions had much larger growth and the south and northeast rose over 20 per cent while the west and midwest rose 10.9 and 5.7 per cent, respectively, calculating home sales rising approximately 9.6 per cent during the year to June 2015.
Barclay's Bank predicts a three to four per cent growth in 2015, sighting that tighter credit conditions and higher mortgage rates are a factor that could limit appreciation of home prices in the United States. Keeping those expectations in mind, home ownership, in my opinion, is better than renting your primary residence.
Four tips to purchasing real estate
Always access the regional trends and be cautious while in overheated markets in large cities; the marketplace can change very quickly, so choose your home type carefully. For example, the condominium market is more susceptible to price change than a semi or single-family home.
Always be very mindful of your household debt to debt servicing ratios. Over-leveraging to buy your family home leaves the owner susceptible and vulnerable to unforeseen events such as loss of income and mortgage rate changes.
Accessibility is also very important. I advise clients to look at whether a house outside the city in the suburbs is worth the personal cost of commuting. A great deal of people spend up to or more than an hour commuting to work. What is the personal cost of this to you and your family? What are the costs of one or more vehicles? How does it affect your quality of life? An important factor is also the cost-benefit analysis of renovating your current home versus buying a new one.
As stated by Tom Woods, the chairman of NAHB "The fact that builder confidence has returned to levels not seen since 2005 shows that housing continues to improve at a steady pace in the United States." I equally agree that the road forward looks steady with moderate growth so long as current market conditions remain the same.