The FOMO market

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This article was published 17/04/2021 (1606 days ago), so information in it may no longer be current.

Like everyone else buying a home these days, Mackenzie Kolton paid over listing price for the single-family home she recently purchased.

But paying a premium was well worth it to the 20-something Winnipegger, working in the non-profit sector with LGBTTQ+ youth.

“I was looking at the next three to five years of my life, and I realized that rent is almost as expensive as a mortgage with the expectation I had for living space,” says Kolton, who saved enough over several years for a five per cent down payment on a modest home.

Many other Canadians have the similar idea. Real estate is booming everywhere. That includes Winnipeg which set an all-time sales record in March with the average price of a single-family home reaching more than $370,000.

And it’s a sizzling market that is seemingly defying logic.

After all, we’ve been mired in a pandemic for more than a year, and at its start last spring real estate appeared headed for a deep, dark hole.

Home sales largely froze with the rest of the economy through April and into May. Yet one year later, the pandemic has proven the opposite, actually sparking the strongest housing market in recent history.

The reasons are many. Chief among them are historically low interest rates on mortgages. As well, most people have spent more time at home realizing they need more space than their current abode offers. What’s more, Canadians who kept their jobs can save more for a down payment because they are generally not splurging on vacations, dining out, going to Jets games or attending concerts.

“Add to that pent-up demand from early in the pandemic, and there is this perfect storm,” says Brent Parnell, a mortgage professional with Vertuity Mortgage in Winnipeg.

In turn surging sales have “led to low supply, which has sparked bidding wars … where some homes have gone $100,000 over listing price,” he adds.

The froth has led many leading financial institutions to issue warnings, including RBC. It released a report earlier this year calling Canada’s real estate a FOMO (fear of missing out) market.

Furthermore, just this week (April 12) it released the results of a survey finding buyers are worried.

“We found 62 per cent of Canadians believe they might be priced out of the housing market in the next decade,” says Amit Sahasrabudhe, vice-president of home equity financing at RBC, adding that number falls to 53 per cent for Manitoba and Saskatchewan.

The survey also found that demand is unlikely to abate anytime soon, revealing one in three surveyed plan to buy a home in the next two years, and of those 60 per cent were saving nearly $800 a month ($500 a month in Western Canada).

“This notion of FOMO is absolutely starting to take place,” Sahasrabudhe says.

Buyer interest is definitely as strong as it’s ever been in Winnipeg, adds one veteran realtor.

“It reminds me of 2007 when we went through an unbalanced market and were getting as many as 10 to 20 offers on a house,” says realtor Chris Pennycook with Royal LePage. “The difference today is the amount people are bidding over is different.”

In 35 years in real estate, he adds he has never seen purchasers willing to bid as high over asking price as today. The market is seeing a diversity of buyers that includes down-sizing boomers to move-up buying Gen-Xers able to afford their dream home thanks to low rates. Yet it’s the first-time buyers driving the market.

“But it’s getting tough for them; many have bid on five to seven houses and still don’t own a house,” Pennycook says.

Homes in the $200,000 to $500,000 range — the affordability sweet-spot — are selling with lightning speed, he notes. As such, he recommends first-time buyers in particular do plenty of preparation before entering the house-hunting game.

Getting pre-approved for a mortgage is a must, so buyers at least know how much you can afford, Parnell adds.

So, too, are the basics of money management like developing a budget to save for a down payment. As well, it’s important to develop a secondary budget that includes all the costs of homeownership: mortgage payments, property taxes, utilities, insurance, renovations, and maintenance.

“For first-time homebuyers, there are also a few programs available to help them get a down-payment,” Parnell says. Among them is the First-Time Home Buyer Incentive where the federal government provides five to 10 per cent of the cost of a home as a matching down payment that must be repaid after 25 years or when the property is sold.

Buyers must also pass the mortgage stress test, qualifying for their mortgage at the greater of the Bank of Canada benchmark, five-year fixed mortgage rate of 4.79 per cent, or two percentage points higher than the rate offered by their lender. Recently the Office of the Superintendent of Financial Institutions (OSFI) proposed increasing the mortgage stress test qualifying rate starting June 1 — although it would only apply to buyers with more than 20 per cent down payments.

Parnell says the current test — although much-maligned when introduced in 2018 — is now a safety valve in this hot market, preventing borrowers from getting into financial trouble if rates rise significantly.

“So, although you have got variable rates hovering around 1.5 per cent and fixed rates around two per cent, … people still have to qualify at the same (4.79 per cent) rate.”

Pennycook adds despite the booming conditions, and the stress test, Winnipeg remains one of the few markets in Canada where single-family detached homes are still attainable for first-time buyers.

“We’re still extremely affordable.”

Kolton sees it that way too.

“From a financial perspective, it seemed like the smartest move.”

Of course, it’s about more than money, she adds.

“I am just so excited to have my own space and move into this next chapter of life.”