A sold sign is pictured outside a home in Vancouver.The Canadian Press
Rob Carrick hosted a Facebook Live Q&A session on Wednesday to answer millennials' questions about buying a home. Here are some edited excerpts of that discussion.
How do first-time home buyers make sense of what is happening right now in the housing market?
We just recently saw the October sales numbers, and they were pretty strong. Even in Vancouver, sales were down, but prices were strong. Prices were strong in a lot of cities. I would caution people that those results reflect the world before the full impact of the latest round of federal government mortgage rules and the latest mortgage-rate increases. We could see things cool a little bit because of those measures. I'm not saying we will, but we certainly could, and that could have an impact on home prices, and you might be rewarded by taking a cautious wait-and-see approach on getting into the markets.
Why are rates rising?
The markets have long been waiting for some piece of information that suggests interest rates are going to return to more normal levels. We are at crazy, emergency low levels because of economic weakness, and investors have decided U.S. president-elect Donald Trump's economic policies might be just the thing. The idea is that Mr. Trump will pump in a lot of money in terms of infrastructure spending. There is speculation he is also going to remove a lot of red tape in the financial industry, and that could stimulate economic activity. That equals growth, and that equals inflation, and that means higher interest rates.
How much do you recommend people put down for a home?
The standard advice is to try to put down 20 per cent, because then you avoid paying the cost of mortgage default insurance. But if you waited around and delayed your purchase over the past two years to build up the 20 per cent – let's say you were at 10 or 12 per cent – in certain places, like Toronto, the market ran away from you. While you did save some money by building up your down payment, the price of the house ran way higher and you're probably spending much more than you would have if you'd bought when you had a lower down payment. I don't have any problem with people buying with smaller down payments. Some people in the mortgage industry say that smaller down payments tend to correlate with higher default risk, but I say, know yourself. If you have a smaller down payment and you can handle the mortgage payments that will result from that, then go ahead. To me, the key is not the size of your down payment, it's how much money is left over after you pay your mortgage and other housing costs.
What percentage of your monthly income should be going to your mortgage?
There's a general rule that your house, your mortgage payment, your property taxes, your heating bill and all your other debt should not be much more than roughly about 40 per cent of your gross pay. I'd like to see you come in well below that to give yourself a bit of elbow room to afford higher interest rates, to afford daycare, to afford car payments and to save for retirement. You wouldn't even know how much you'll need that flexibility until you start owning the house and you've got to replace the roof, and the driveway, and fix other things up, and all sorts of other expenses come up and you think: "Gee, I'm really glad we didn't max out our mortgage."
Would you consider buying a spec condo as an investment? We own a house that is paid off. Our first child is going to university next year and could either move into the condo or we could sell it.
I would say, no, I would not, not right now. Smart investors buy low and we've seen the market come up, up and up for years, and I just don't think now is a good time to invest in real estate. I think a good time might be coming, and if you're interested in that, keep your money safe and at the ready, and maybe you'll end up buying a couple of condos. My wife and I were looking for houses in Toronto in the early 1990s, and it was right after a huge crash in the Toronto market and a lot of houses were being sold for considerably less than what they were being sold for even two years earlier, and my regrets all these years later is that I didn't buy a six-pack of houses, because we would have made out like bandits.
Will B.C. kill its foreign home-buyers' tax drop if the market cools?
I think government would not want to remove that until well after we have a drop in house prices, because eventually we'll want to have foreign buyers come back in and get involved in a reasonable way. But we want to make sure the market has well and truly cooled off before we remove that tax. For example, in Vancouver, we see sales falling considerably and it's directly tied to that tax, but I wouldn't expect the province to remove it in the next couple of months. It might be years.
What would your advice be for buying in big cities like Mississauga or Toronto? Should you just look outside the GTA?
People have this idea that moving to the suburbs is the answer to high real estate prices. Moving to the suburbs presents a number of other issues, and costs in time and money. Even if you're in the outskirts of Toronto well served by the GO train, you're going to be spending a considerable amount of money on GO Train passes, you're going to be living by the GO Train schedule. There's the time costs, so consider that part of it. If you're going to be spending 2-3 hours commuting every day, you're going to have to be comfortable with that and feel that it's worth it to get that larger house outside the city. You can save money by moving outside of the city, but, you know what, some of the hottest price increases are happening in the outskirts around Toronto because a flood of people think houses are cheaper to the north, east and west, and I think people are finding themselves in parts of the province that they never expected, and I really caution you to think about the lifestyle of living in suburbia: a lot of big box stores, a lot of subdivisions and schools and ice rinks, and not a lot of restaurants, and bars and fun stuff that you get in the city.
Is greed ruining the housing market?
Houses are financial assets, and it's the interplay between greed and fear that guides where housing prices go, so this is what is pushing a lot of housing prices now. If it turns around and fear takes over, you're going to see a lot of bargains. I think the housing market is coming back to a more reasonable zone. It is getting darn expensive right now, and a lot of people in the market have greedy expectations about what they will get out of their real estate investments, and we'll see if they're right.
What are your thoughts on first-time home-buyers who could potentially owe more than their house is worth?
If you owe more than your house is worth, it's called being underwater. It is a problem on paper and emotionally. You're going to feel really bad about having a ginormous mortgage that's worth more than your house, but your bank will not trouble you as long as you're making your payments right on time and you are an A+ borrower. You may not like it, but it may happen and you just have to stay in your house for a number of years and let the market come back. You'll pay down your mortgage, and the price of your house will eventually start to increase and you'll be on dry land again.
This interview has been edited and condensed.
Rob Carrick