This text is part of the special section The great builders
Is it more profitable to buy or remain a tenant? This is the question on the lips of any tenant who is considering becoming a homeowner. And what explains the current residential real estate market, where property values keep increasing? Moreover, should we fear an increase in interest rates if inflation sets in permanently?
According to Hugo Neveu, mortgage broker and senior partner at CONSORTIUM Hypothécaire and vice-president, merger and acquisition, for Synex Business Performance, buying a property, as a rule, is a good deal. To demonstrate this, he made a hypothetical comparison between a new owner who has a 5% down payment and obtains a mortgage of $ 200,000 with a monthly payment of $ 1,600 on the one hand, and a tenant with a rent. of $ 1000 which would invest the difference between the rent and the monthly mortgage payment, or $ 600, on the other hand.
“In the first two and three years, the tenant who would invest the $ 600 would come out a winner, since his investment would increase faster than the value of the property,” explains Hugo Neveu. But then the opposite happens, and the owner has the advantage, as the property has continued to rise in value and the mortgage balance has shrunk. Basically, what is not recommended is the purchase of a property with a small down payment in the hope of reselling it quickly in order to generate a profit. This is where the financial risk lies. “
A bustling market
The Canadian Real Estate Association (CREA) estimates that the national price of a home in 2021 will be $ 680,000, an increase of almost 20% compared to last year. What explains such a surge in prices? “We are in a sellers’ market, since the supply is not sufficient for the demand, hence the increase in the value of properties available on the market”, explains Hugo Neveu.
Did the pandemic play a role? “Certainly, maintains Hugo Neveu. People found themselves confined to their homes, and teleworking spread. Several tenants have made the decision to find a home better suited to their new needs and have entered the real estate market. “
Another interesting figure, the increase in the number of mortgage loans in Canada, a jump of about 42% between 2020 and 2021. “Almost a third of this jump is explained by mortgage refinancing, continues Hugo Neveu. Since interest rates are low and mortgage refinancing is based on the current market value of the property, many homeowners have refinanced their mortgages, allowing them to free up cash that they can then invest. often in the renovation of the property. Here, too, the pandemic has played a role. “
A factor that also explains the shortage of supply is linked to the behavior of baby boomers. “In the early 2010s, it was expected that baby boomers would mostly sell their single-family homes and then move into a condominium or townhouse. But the phenomenon did not happen that way, and many of these homes never went on sale, which reduced the supply. My hypothesis is that it is the grandchildren of these baby boomers who will benefit from the arrival of these residences on the market. “
A rise in interest rates?
For now, interest rates remain low, but inflation is pointing its nose. Economists believe that the latter is temporary, caused mainly by the pandemic, but if it were to persist, central banks would have no choice but to raise the key rate. Should current or future homeowners fear a rise in mortgage rates?
“Not really, says Hugo Neveu. On the one hand, it would take three successive increases of a quarter point of the key rate to see a tightening of access to credit, and on the other hand, an increase in the interest rate would have no repercussions on holders of a fixed rate mortgage before their mortgage contract expires. »What about variable rate mortgages? “They would suffer the increase in interest, but the majority of lending institutions will choose not to increase the monthly payment, preferring to allocate more to the interest. Thus, the monthly payment remains the same, but the repayment of the capital takes longer. “