Your Money: Should you Buy or Rent?

Falling rental vacancy rate shows home buyers are more cautious according to Andrew Allentuck. In the current housing market more people are choosing to rent, either giving up on buying or postponing the decision until prices drop. It appears prices in the formerly booming Canadian home market have reached a peak and are descending. Lower prices are a good thinkg for first time home buyers, but in the face of lower auto sales in the U.S. (a big factor in the auto parts economy of Southern Ontario) and lower commodity prices (a big factor in the mines and oil fields of B.C., Alberta and Saskatchewan), potential home buyers are being more cautious. The feeling is that times will get tougher. The Canada Mortgage and Housing Corporation’s June 2008 housing survey shows more people are choosing to rent or being forced to rent. Nationally, vacancies decreased to 2.6 per cent in April 2008 compared to 2.8 per cent a year earlier. The lowest rates in the 2008 survey were in Victoria (0.3%), Kelowna (0.3%), Sudbury (0.7%), Vancouver (0.9%), Saskatoon (0.9%) and Winnipeg (1%). By comparison, high vacancy rates were in places like Charlottetown (5.3%) and Moncton (6.1%) where mining, oil and car making don’t take place. Falling vacancies can indicate many things, but in the present housing market, the fact it’s getting harder to find a house or apartment to rent implies that many people are waiting for prices to drop or are unable to come up with the downpayment for homes of their own. This is cautious behaviour, an indication that the rush to buy a home is ebbing. The feeling that if one does not buy now, a home will be unattainable is waning, replaced by hesitation to take on debt for a home that could fall in price. AT the same time that vacancy rates drop in Ontario and in the western Canadian provinces, prices of houses and condos show signs of cooling. “The much anticipated housing market slowdown in Canada has arrived,” said a May 2008 report from the Royal Bank’s Economic’s Department. In April 2008, resale activity of existing homes dropped 6% compared to the same period a year earlier. Listing of homes for sale rose 18% year over year an dprice gains rose 3% compared to 10% a year earlier. Speculative housing listings moved far ahead of prices. For example, in Saskatoon, listings rose 121% in April 2008 compared to April 2007. That amount of rise in offerings suggests that owners of homes were anxious to score capital gains. Saskatchewan has had increased activity in potash and uranium mining and oil production. But commodity prices have dropped drastically since May 2008 and with them, homes prices in the West.

Nationally, home construction has declined. Canada Mortgage and Housing Corp said 185,600 new homes were built in July 2008, a 13.6% drop from June. Home buyers are taking a wait and see attitude. Falling prices offer them an incentive to be patient. Interest rates are still in a low range. Open mortgages with rates around 4% to 4.75% can be found. But bank lenders have tightened lending standards in the wake of the U.S. created credit crisis and money is harder to get. Zero down mortgages have been terminated by CMHC, a factor that reduces the number of people who can bid for homes. Nationally, housing is shifting from a seller’s market, in which potential buyers have had to bid over offering prices, to one in which it will be possible to get a home by bidding under the asking prices. For home buyers and sellers switching homes in the same area, trend changes should not matter much. For those buyers entering formerly hot markets like Saskatoon, Regina, Victoria, Vancouver, Edmonton and Calgary there is potential to score a bargain. For home buyers who can afford to wait or who, for lack of downpaymetn, must wait, the question is: when will the market bottom out? Canada has no crisis like that in the U.S. says the Royal Bank’s economics department, but caution in the face of tougher times in understandable and evident. Timing markets is tough to do as well. With the economics of Canada, the U.S. the European Union and most emerging markets in difficulty, asset prices are headed lower. In this time of trouble, a house still represents a solid asset. For anyone who wants to keep a house for years or decades, the time is ripe, or at least near ripe, for a good purchase. For sellers, things could get worse. For folks thinking of renting until the economy improves, there are transitional costs, such as moving expenses, breakage and even the bother of changing addresses. The Canadian housing market is shifting to a buyer’s phase. Timing the bottom is tough, but a couple of years from now, it may seem to have been a fine moment to have bought. Andrew is the author of Bonds for Canadians: How to Build Wealth and Lower Risk in Your Portfolio, published by John Wiley & Sons Canada Ltd.