On August 1, 2014, I celebrated my second year as a homeowner. In August 2012, I purchased my dream home, a beautifully-renovated three bedroom bungalow in eastern Toronto for $425,000. Through hard-work and goal-setting, I’ve managed to pay off over half my mortgage in two short years.
Toronto and Vancouver are considered the two hottest real estate markets in Canada. I started looking for a home in January 2010 – it took me nearly three years to finally purchase a home. It wasn’t that I was being overly picky – the housing market is just very competitive. If I hadn’t of purchased my house when I did, I could have easily found myself priced out of the market.
Losing Out on Bidding Wars
The house I ended up buying was actually the third house I made an offer on. I made offers on two other houses before finally buying my dream home.
The first house I bid on was exactly what I was looking for – a three-bedroom bungalow with a basement apartment to help subsidize my mortgage. The only problem was there were six other buyers interested. It didn’t help my realtor wasn’t fully prepared – she didn’t provide any comparable properties to help me figure out how much to offer, so I was clueless when it came to an offer price. Needless to say, I didn’t make it past the first round of negotiations.
The second house I made an offer on was less than desirable. It was a crammed two-bedroom bungalow. It was the summer of summer 2011 and I started to notice how much house price had gone up. Instead of being able to afford a beautifully-renovated bungalow for under $400K, I could barely afford a fixer upper in my desired neighbourhood. I made an offer on the house, but I was glad when my offer was rejected. The house ended up selling $20K over asking – I would have kicked myself if I paid that much.
What Does “Priced Out of the Market” Mean?
Being “priced out of the market” means no longer being able to afford your dream home because house prices have appreciated so quickly. Home prices go up faster than your savings can keep up. Homebuyers in red-hot markets like Toronto and Vancouver are perfect examples of where you could be in danger of no longer being able to afford your dream home simply by sitting on the sidelines.
For example, the average selling price in Toronto in August 2014 was $546,303 – up 8.9 per cent in comparison to the average of $501,677 reported in August 2013, according to the Toronto Real Estate Board (TREB). That represents an increase of $44,626 from last year. If you weren’t able to save at least that much your purchasing power would begin to erode. Instead of being able to afford a three-bedroom house, you might have to settle for a two-bedroom house. If house prices keep going up, next year you might have to settle for a condo.
Should I Buy Now or Later?
Some homebuyers decide to sit on the sidelines hoping home prices will come crashing down. Although the Canadian real estate market has been called overvalued by groups like the International Monetary Fund (IMF), it hasn’t shown any signs of slowing down. Unless interest rates spike or we have another financial crisis, it’s hard to see how housing prices could suddenly drop 10 per cent overnight. It’s more likely the appreciation of home prices will slow; although even say a four per cent increase in prices can price some buyers out of the expensive markets like in Vancouver.
If you’re a homebuyer, you’re generally better off buying when you’ve saved the minimum five per cent down payment. If you’re on the cusp of saving 20 per cent, it probably worth waiting until you can save up at least 20 per cent to avoid costly mortgage insurance. Just make sure you aren’t priced out of the market while you save.
Are you worried about being priced out the market?
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.