|6 Months||3.10 %|
|1 Year||2.99 %|
|2 Years||3.24 %|
|3 Years||3.09 %|
|4 Years||3.34 %|
|5 Years||3.24 %|
|7 Years||3.34 %|
|10 Years||3.79 %|
|Current Prime||3.70 %|
|5 Year Variable||2.65 %|
By Jason Heath
There has been plenty of talk about a potential real estate bubble in Canada in recent years. A decision to buy, rent, upsize or downsize could have a profound impact on your financial situation for years to come.
There is certainly a compelling argument in favour of renting right now. Deutsche Bank released a report in December that determined the home price-to-rent ratio in Canada was 88% above the historic average. In other words, it’s a renter’s market right now, at least on average. This doesn’t bode well for real estate investors, who are at risk of paying a premium for property compared to the rents they may be able to collect.
Typically, I feel that if you expect to stay put for at least three years, buying is a better financial choice than renting. Your breakeven could be more or less of course if real estate prices decline or rise considerably. Besides that, there is a certain non-financial return that comes from home ownership that is hard to quantify and different for everyone.
Should you upsize? Plenty of young people are contemplating this given today’s low interest rates. If you can lock in a low rate for five years, hopefully your maternity and paternity leaves are done and your incomes have risen by the time your mortgage comes due at higher rates.
The Deutsche Bank report found that the home price to income ratio was about 32% above the trend line. Canadians are now paying about eight times their gross income to buy a home, compared to about six times historically. Over the long run, most things tend to trend back towards the averages.
So the decision to upsize has competing influences. I think the key needs to be based on how such a move impacts your budget and your ability to balance other long-term financial goals like retirement, children’s education and some of life’s indulgences, especially if and when interest rates begin to rise.
What about downsizing? I’d say there are two camps that should be considering this. The young family who has made some money on their house and can potentially live in a smaller home has to seriously consider if downsizing could accelerate their path to debt freedom and free up cash flow for retirement savings.
Likewise, a retiree or near retiree has a chance to take some money off of the table and either accelerate their potential retirement or top up their retirement nest egg with a downsize.
So as you assess the potential of buying, renting, upsizing or downsizing, the most important thing you can do is work out a budget, understand the risks of home price declines or interest rate increases and then make the best choice you can.
There is no one-size-fits-all answer to life’s financial questions.