Buying at the peak vs buying now: Who has the bigger advantage?
There is a big push/pull going on right now in the real estate space. The debate between homeowners and professionals alike over who is at a bigger disadvantage - those who purchased with a low rate at peak prices and are watching their hoe values drop, or those who are purchasing now at lower prices but gambling on higher interest rates
The best answer? Neither buyer is at a disadvantage at all.
We talk to homeowners every day this winter who purchased in the past 2 years when prices were artificially inflated across the country. These buyers (yep, even those who locked in at a comfortable sub-2% fixed rate) are in a state of disbelief watching prices come down, and worrying that they overpaid for the place they have been calling home. At the same time, we speak to buyers who purchased just this fall, or who are hoping to purchase soon, who express concern at purchasing now despite lower property values because rates are set to continue their uphill climb into the new year. And in both cases, concern is justified - it’s no fun considering that “what ifs” of one of the biggest purchases of your adult life. But from where we sit as mortgage professionals, it’s essentially a “grass is always greener” situation. That is to say, neither the peak buyer or current down market buyer is at a particular disadvantage. The two experiences are simply different, and in both cases the good outweighs the bad. Here’s what we mean.
The Upsides of Buying During the Uptimes
We have said it before and we’ll say it again - time in the market is always better than timing the market. So, if you purchased a house in 2021 or early 2022 when prices were at their peak, congratulations! That means you have had 12-24 months of cutting down your principal, building equity and getting closer to the end of your amortization! You have had two more years than current buyers to build wealth in your home, all while settling into a place that you love.
If you purchased at one of the aforementioned historically low fixed rates, then you’ve probably had your eyes peeled on renewal, wondering how much your new rate will increase your payment. But remember, not only was your income stress tested at a rate of 5.25%, but your balance left owing on your mortgage will be 5 years lower than it was when you purchased. At the same time, your amortization will be 5 years shorter (but it can be re-extended to save on your monthly payments if necessary). While we don’t have a crystal ball, we can safely assume that for most buyers renewing after purchasing at the peak, the increase will be managable. Let’s look at an example based on our best guess of where rates will be:
February 2022
Purchase Price: $816,720
Minimum Down Payment: $57,171
Mortgage Amount: $789,931
5 year fixed rate: 2.4% (25 year amortization)
Monthly payment: $3,499.41
November 2026
New Mortgage Amount: $623,498
5 year fixed rate: 4.5% (20 year am.)
Monthly payment: $4,206.25
OR
5 year fixed rate: 4.5% (extended 25 year am.)
Monthly payment: $3,692.94
Also keep in mind that real estate is cyclical and that even when values fluctuate in the short term, history dictates that values will always appreciate in the long term. This means that even if it takes a few years of the market regaining some stability, your property value will eventually exceed what you paid at the peak.
Real estate is a long game and if you purchased at the peak, you are officially playing! It’s important that we shed the notion that purchasing a home for an artificially inflated price was somehow the wrong decision to make. At the end of the day, you are one of the lucky Canadians who owns a home to grow some roots and you should be proud of that fact!
The Upsides of Buying While Things Are Down
Now, let’s open this part of the conversation by addressing the elephant in the room: just because there are certain upsides to buying during a downturn, you should not feel any pressure to purchase. Whether that’s from your mortgage broker, your realtor, or your great uncle Tom - the only person who can decide if it’s the right time for you to buy is you. As mortgage professionals we can arm you with the information you need to make the best decision for yourself, but we will do that no matter the economic climate.
So of course, the glaring upside to buying during a downturn is that property values have come down substantially in many major urban areas. In some cases we have seen decreases by as much as 15%+. Lower prices mean lower down payments, and lower down payments mean less cash up front. But it’s no secret that on the flip side of that, rates have been increasing as well. As a result, the narrative that purchasing now is actually going to cost you more than if you purchased the same home 2 years ago. But that’s actually a bit misleading. Let’s look at one example using the national CREA average sold price:
February 2022 (Peak)
Purchase Price: $816,720
Minimum Down Payment: $57,171
Mortgage Amount: $789,931
5 year fixed rate: 2.4% (25 year amortization)
Monthly payment: $3,499.41
Balance at renewal: $667,229.96
November 2022
Purchase Price: $644,643
Minimum Down Payment: $45,126
Mortgage Amount: $623,498
5 year fixed rate: 4.99% (25 year amortization)
Monthly payment: $3,622.75
Balance at renewal: $551,755.77
So as you can see, the difference in monthly payment between buying the same home at the peak isn’t non-existent. But if you are in a position to buy this winter and are able to qualify at today’s rate, then that roughly $158 shouldn’t be what scares you away. Plus, take a look at that balance at the end of 5 years! Sure, today’s buyers are paying a bit more interest but the overall money owing is so much less.
The moral of this story? There is no way to definitively call any time a “good” or “bad” time to buy. At the end of the day it simply comes down to when it works best for you, your finances and your family. If you take the time to understand your finances and your needs, and work with a professional who will help you navigate both finding the right home to purchase and securing the financing you need, you will always come out on top.
