Tracy Clark and her new husband realized last year that it was time to plunge into the second biggest commitment of their lives.
After nearly seven years in a one bedroom rental, they decided to move into something a bit more spacious and join the exclusive ranks of young, Okanagan home-owners.
“We waited until we felt we had secured enough money to go into a mortgage and maintain our existing lifestyle,” she said.
“Plus the market really helped. The economic downturn made it easier for us to purchase a home without over-extending ourselves.”
“Stability” is the Canadian Mortgage and Home Corporation’s word to describe 2012 market conditions, but over-extending seemed to be how many coped during the Valley’s preceding boom and bust cycles.
Leveraging all resources was the norm for new buyers when prime lending rates in May 2008, sat at six per cent.
At that time, Kelowna reached the absolute height of its real estate market, in terms of pricing. Single detached houses reached a median price of $485,000. The median price for a condo style apartment style at that time was $265,000.
The newlyweds, like many other Canadians, weren’t lured into buying then, however, opting instead to put their money down in what many are calling the bottom of the market.
The prime lending rate is now at three per cent, which is only slightly higher than it was at the depth of the recession. A median detached home settled at $403,000 by February of this year while the median condo price comes in at around $206,000. Low prices and lending rates combined created conditions that got many Canadians to take on mortgages they previously couldn’t have afforded.
“No matter which way the market goes now, we’ll be OK. But it’s common for people we know to be in the position that they if they lost a renter, or something went wrong they’d be in trouble,” said Clark.
“We certainly took their stories into consideration before we made a purchase.”
A survey complied for the Bank of Montreal by Leger Marketing and released Wednesday highlighted Clark’s observations, finding that a high number of Canadians are feeling insecure about their finances.
Around 43 per cent believe a two per cent increase in interest rates would leave their ability to afford their home on unsure footing. Specifically, 20 per cent said a two per cent rise in rates would hamper their ability to pay their mortgage while 23 per cent just weren’t sure.
While the figures already paint a fairly bleak picture of household finances across Canada, local mortgage broker Scott Peckford thinks they may actually worse locally.
In a time when Canadians find themselves deeper in debt— mostly through taking advantage of low rates to buy homes or take out home equity loans—household debt to disposable annual income is above 150 per cent, and Peckford says he sees countless people getting into further debt, to manage what they’ve already accrued.
“A lot of clients have taken out lines of credit at three to four per cent, and they’re only managing to pay the interest,” he said, noting high local housing prices exacerbate the problem.
“When rate goes to six per cent, that doubling in payment may be enough to push them over.”
It’s a fact he believes many put on blinders to, so they won’t have to face dire realities.
“Most people don’t have a space to hiccup,” he said. “If anything happens at all, they have no safety net. You don’t know that you need one until you have a problem.”
Considering BMO anticipates that the Bank of Canada will begin increasing interest rates from the current, by one per cent next year, the need for a safety net or comprehensive planning may soon become clear.
Many in the mortgage industry have advised homeowners to take on variable mortgage rates as interest rates had remained low since the end of the recession.
Chris Murphy, of Dominion Lending, however, says it’s not the time to make any rash decisions. In fact, he believes most of the people he sees are in a good position to handle whatever modest increases they face and get the financing that best suits their personal needs.
“At this time, when rates are poised to be moving, we’re not seeing big jumps,” said Murphy, noting a recent increase from a lending rate of 3.19 per cent to 3.59 per cent will amount to $90 a month on a $400,000 mortgage.
“And any responsible lender will query buyers on how they will be five years down the road.”
Above all else, Murphy also thinks young Canadians are getting a better understanding of their finances than has historically been the case. Those who are carrying a load of debt are quickly realizing they have to get their figurative house in order before they can be the owners of a literal house.
“There’s a lot of education going on in last while. I have to laud the minister of finance for dealing with Canadian debt level.”
ReMax realtor Cliff Shillington also pointed out that rising lending rates aren’t a sign of impending financial carnage—it’s a sign the economy is getting healthier and home equity will grow.
Something Kelowna’s showing signs of already.
Recent real estate stats show an uptick in sales last month, and that’s largely due to more investors coming back into the market.
“The other thing is Albertans are coming back into the market. In the month of February, their numbers rose by 20 per cent.”
We’ll likely never head back into the boom cycle that defined the early part of this century, he said, but the damage wrought from the recession is starting to fade.
And, he added, the Okanagan’s history of booms and busts will likely be repeated. He’s just not sure when or how big it will be.