Is there ever a perfect time to buy into the market?
Rising interest rates are not only cooling off the housing market, they’re also changing the conversation that many clients are having about whether they should rent or buy their home.
“It’s all about understanding their needs, but the rent versus buy conversation is coming up more often, and the conversation is certainly changing at the moment,” Mike Schilling, president and chief executive officer of the Community Savings Credit Union (CSCU) told Wealth Professional.
Schilling said many millennials are contemplating investing in their first homes, especially if they have been working from home and no longer need to live near their city jobs. Empty nesters are also considering it when deciding whether or not to downsize.
A recent report on Canadian housing affordability showed that mortgages on a representative home in Canada now take 63.9% annual income to service, which is the highest since 1982. In Toronto, Montreal, and Vancouver, monthly mortgage payments on non-condo homes were more than double the average monthly rent for a condo. The monthly mortgage payments were closer to the average monthly rent range in Calgary, Edmonton, Winnipeg, and Quebec City.
In the British Columbia context, Schilling said people want to live in the lower mainland, which is expensive to either rent or buy, so they’re moving into the Fraser Valley, or onto the Sunshine Coast, or further north to Squamish, where it is cheaper to buy homes than in downtown Vancouver.
“Buying a house is an investment, but it’s obviously much more than that,” he said. “We see lots of people changing their minds about whether they want to buy or where they will buy or rent.”
Given housing prices and climbing interest rates, younger people may still be borrowing from the bank of mom and dad, but also opting to rent for another year to see if interest rates will decrease.
“I don’t know if that’s because people are used to living in an ultra-low rate environment, but there’s a sense that people are wanting to sit out the storm,” said Schilling.
This housing market has also been changing the options that are available to clients, so Schilling encouraged advisors to help them by checking programs that might be available in their area.
CSCU, for instance, has products to help clients save at higher rates if they then use one of their mortgages. Given how unaffordable Vancouver-area housing is, it has also partnered with Cascadian Green Development to launch a rent-to-own program. That is building eight affordable homes so Vancouver residents can put the rent they pay for those toward a down payment for a future home.
Schilling also suggested that those who still want to invest for a while before buying could invest in a real estate investment Trust (REIT) that focuses on the area where they want to live.
“You can link your investment to the local housing market,” he said. “We’ve seen a lot of interest in that from people not wanting to put their money in fixed interest products earning 1% or 2% when they’re reading that house prices are increasing by 10% to 15% in the area where they want to buy because they feel buying a house is just moving further away from their grasp. So, they can put the deposit that they’ve saved or been given into something that is going to track their local market.”
Read more: Are REITs a good investment?
Advisors can play a key role in helping clients who may be struggling with the rent or buy decision.
“When people are talking about buying a home, it’s a long-term investment,” said Schilling. “Advisors who can explain that to their clients are really helping them the most by noting there will never be a perfect time to buy into the market. That can take away some of the fear factor.”