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Increasing home prices along with more expensive mortgage rates mean some home buyers are turning to more affordable options.
While condos are generally less expensive to buy than single-family homes, take care to consider condo fees and reserve funds. Photo by Greg Southam /Postmedia
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Edmonton’s resale market’s recent rise in activity among condominiums and row housing is a result of increasing affordability challenges likely to become more difficult in the coming weeks amid higher borrowing costs, market observers say.
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“The townhouse market in the $300,000 to $350,000 range is very active because people are being priced out of the market with single-family (homes),” says Marc Crossman, mortgage broker with Mortgage Alliance Lending Advisors in Edmonton.
Year to date, ending May 31, condominium sales are up 31 per cent, and row sales have increased by 24 per cent. In contrast, single-family detached home sales are up about eight per cent.
The reasons are two-fold with prices of single-family detached homes reaching all time high, including the average price in May exceeding $492,000.
Mortgage rates have increased interest rates amid the Bank of Canada hiking its overnight rate by 125 basis points between early March and early June.
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That’s led to the prime lender rate reaching 3.7 per cent.
Variable rates mortgages are now adjusting to the latest 50-point hike by the Bank of Canada on June 1, while fixed mortgage rates have already increased in tandem with bond market yields that price in central bank rate hikes before they even occur, Crossman says.
He further notes seeing “a shift from variable to fixed has been happening over the last couple of months” among clients. “It’s a recognition that the party is over for low rates.”
Variable mortgages are affected most by the recent interest rate hike of 50 basis points, says Sung Lee, a mortgage expert with RatesDotCA in Toronto.
“You will see an extra $26 of cost for every $100,000 in mortgage.”
Borrowers with an adjustable payment variable rate mortgage, in which the payment increases with the prime rate, will see their monthly mortgage costs rise. In contrast, other borrowers with variable rate mortgages will see monthly payments remain the same, but their amortization lengthen, he explains.
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Certainly, higher rates will have many buyers concerned, given even before the latest rate hike, a study by Chartered Professional Accountants Canada found Albertans were more worried on average than other Canadians about rising housing costs.
“More than eight in 10 are worried about being able to afford that mortgage,” says CPA Canada spokesman Sandy Lyons based in Lethbridge.
He adds it makes sense more first-time buyers would be looking at condominiums — townhome or apartment.
“But those come with their own challenges,” he says, adding buyers must consider condo fees and reserve funds.
Adding to affordability challenges is the fact more interest rate hikes loom, including a potential 75 basis point rise in July, Lee says.
“For anyone who has a variable rate mortgage, it does make sense to run their own stress test to see how that might impact their cash flow.”
Buyers should prepare as well.
“Getting a pre-approval has become very critical these days,” Crossman says.
“It gives clients a price point, which is obviously important; it locks in a rate, and it’s even more beneficial behind the scenes,” Crossman says, adding it helps the transaction process “avoid mad scrambles” that can lead to unnecessary delays, imperilling deals.
“It’s the linchpin for everything.”
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