Last week in the Globe and Mail, Rob Carrick advised first-time homeowners to hold off on buying a house and put their hard-earned cash into rent for – well, until the "right time". He argues that interest rates will remain low in the foreseeable future and that home prices could drop during the next few years. Renting lets buyers save for a bigger down payment, which decreases the cost of your mortgage considerably.
I'm behind Mr. Carrick 100 percent on making sure that you go into a home purchase with a good down payment. As he notes, using this graphic, ( or see attached, courtesy of TD) doubling your down payment from five to 10 percent on a $375,000 house saves you more than $6,000 in payments over a five-year term (though he suggests you can "save" on principal, which is misleading – a larger down payment reduces your monthly payment while allowing you to pay more principal and less interest each month.)
I'd go further. Having a healthy buffer beyond your down payment gives you quick access to cash to ride out financial bumps that might be caused by surprise home ownership costs or even something as major as a job loss.
But many of Mr. Carrick's assertions seem aimed at gamblers rather than inexperienced home buyers.
News Flash! Large cities are not making any more land
Telling people that prices will come down and a home buyer should wait for that day is telling people to gamble with huge amounts of money.
We've been warned about imminent real estate bubbles many times during the past decade, but those who shied away from buying often missed out on 30 to 50 percent appreciation of their properties. As you can see from the chart on this page, while you may have lucked out by waiting for the odd dip during the last decade, the overwhelming trend is upwards. See the attached chart from our book (excerpt from Commercial Real Estate Investing in Canada, written by Claude and Pierre Boiron)
The number of detached single family properties in a city like Toronto is declining. You’re more apt to see two houses levelled to make room for a single large home than you are to see a large house demolished and several built in its stead.
And those folks currently living in condos are a feeder system of home purchasers. Tons of them are biding their time for anywhere from two to 10 years until they can get into a house. Combine that with the lack of new freehold properties in large cities, and you've got a recipe for continued price increases.
It is really such a gamble to bet that prices will drop and try and wait until they do. With the historically low interest rates we're enjoying right now, if you have the money now, and you have a good Realtor to guide you against overpaying, you’d be a fool not to buy.
If the cost of borrowing money is going to go up, why wait for it to happen?
Indeed, Mr. Carrick makes the point that we are experiencing some of the lowest interest rates ever, and he suggests that they're not going up any time soon. Even if they do, he says, it will be in tiny increments. While a single percentage point might not seem like a big deal when we compare today's rates with other periods, it can be critical to a first-time home buyer. Just as you save when you make a bigger down payment, a single percentage point increase can make a huge difference in your monthly payments and your overall interest payments.
Using the example Mr. Carrick drew on from TD Bank, with 10 percent down on a $375,000 house, you would lose more than $21,000 over five years if your interest rate increased from3.29 percent to 4.29 percent on a 25 year amortization. You would pay $187.84 more each month; you'd pay an astounding $16,653.96 more in interest over the five-year term; and you'd come out of the term owing $5,383.70 more on the principal than you would have with a one percent lower rate.
And as Mr. Carrick points out, the government has recently placed restrictions on borrowing for a home. If borrowing's likely to become more difficult, not easier, why would you wait if you can afford to buy now? That's nothing more than a gamble.