You had your best-laid plans and then COVID-19 came along and hammered the entire economy. But you’ve got this – if you have the right information. Join Rob Carrick and Roma Luciw on Stress Test, a podcast guiding you through one of the biggest challenges your finances will ever face.
ROB: When we started this podcast, the homeownership story was one of low interest rates, climbing prices and bidding wars. All along, there was a general feeling that for younger generations, affordable homeownership was wishful thinking.
ROMA: But the real estate market changed drastically in the second half of the year. Now it’s one of rising interest rates, falling prices, fewer listings and slower sales.
ROB: Welcome to Stress Test, a personal finance podcast for Millennials and Gen Z. I’m Rob Carrick, personal finance columnist at the Globe and Mail.
ROMA: And I’m Roma Luciw, personal finance editor at The Globe. Today is the last episode of the season, and we’re taking the pulse of new and aspiring homeowners to see how they’re feeling in this changing market. So we asked our listeners to weigh in. Some are optimistic that now is their chance to get a deal. Others feel screwed by variable rate mortgages. Rob, the real estate market has done this before. Remind us what we’ve seen in previous housing downturns.
ROB: So for a recent column, I was taking a look at long term housing price numbers, and there’s been a surprising lack of big downturns in the market, really? You know housing has really chugged mostly higher year by year since the eighties. Now, there was a really big crash in Toronto in the early nineties, and I mean really big, shocking. My wife and I looked for our first house in Toronto during that period and we were going around thinking, why are all the houses on sale for $50,000 less than the previous sale, which was 18 months ago? A lot of people were just fleeing their houses because they just didn’t want them anymore. I couldn’t afford them anymore. So houses do go down in price. What we’re seeing now is, I think, a fairly hefty, serious decline in house prices. And I think there’s a lot of people in the housing market who’ve never seen the likes of it before.
ROMA: So fast forward to late 2022. We have the central bank hiking interest rates. They’re doing that to fight inflation. House prices are down from the peak. Sales are down. People are waiting this out on the sidelines. Now, that exact combination means different things for different people, depending where you are in the cycle. But fewer listings and all that uncertainty about how high rates will go means that for some people there is a chance to get in the market if they are in a certain situation.
ROB: You know, what really strikes me is prices are falling, but interest rates are high. And so that has really prevented any big improvements in affordability. But low prices are a good foundation, if we could see mortgage rates start to come off a little bit, that might be a sweet spot for the people who’ve been waiting and waiting and waiting for an opportunity to get into the housing market.
ROMA: First up, we’ll speak with a Torontonian who bought at the top of the housing market. And he’s feeling the pain of rising monthly mortgage payments.
OTAVIO: My name is Ottavio. I’m 29 years old. I live in downtown Toronto and I work for an insurance brokerage firm.
ROMA: Ottavio and his partner rented for a few years after living with his partner’s parents.
OTTAVIO: We wanted to get into real estate before it got even more expensive. And, you know, we scoured the web for deals and viewings and showings and things like that for months and months and months. And when we found the right thing at the right time and the right place for the right price. We chose to go for it just to get our foot on the real estate ladder, I guess.
ROMA: In February, they paid $518,000 for a 700 square foot one bedroom condo in Toronto’s entertainment district. They thought it was a good deal, and well within their budget. They took a gamble on a variable rate mortgage.
OTTAVIO: First of all, because of the nature of our place, it’s like it’s a hotel with condos. We didn’t have a lot of choices in terms of banks. So our mortgage broker told us we basically had two choices. So out of that, he gave us a budget with a fixed rate, which was somewhere around 3% at the time, and a variable rate, which was around 1.35% at the time. So obviously, we knew the variable would increase. I personally am more of a conservative person. I was kind of leaning towards fixed. But we talked to my parents, my partner’s parents and as well as the broker themselves. And they said, you know, look, people usually save and it’s your choice, but these are the numbers. And so eventually we decided to go variable because I guess it made sense at the time. And the first payment was, I would say, just under $1,000 biweekly payments.
ROMA: The low payments would only last one month before the Bank of Canada started hiking interest rates. Now Ottavio’s rate is 4.85%. His mortgage costs have risen by about $800 a month.
OTTAVIO: Well, right now I’m paying about $1400 dollars bi weekly. So initially we were doing fine because we have a separate bank account that we would contribute money into just for the mortgage. And we had started over contributing by quite a bit into that account just to kind of account for any changes. So it didn’t really affect us the first couple of months, but ever since then, late summer, I would say we’ve had to redirect more and more funds into that account just to make up for the shortfall. We’ve started dining out less. We’ve started going to the theater less, to the movies. We’ve started, you know, canceling some trips, a trip that we had coming up in December to try and keep expenses under control, not really looking to go anywhere until maybe next spring or summer. So we’ve really had to focus on buying groceries more, eating at home more and really kind of cut down on all that discretionary spending, I guess, that we were doing more of throughout the summer and the spring.
ROMA: To make up for the extra costs. Ottavio and his partner are working hard and considering second jobs.
OTTAVIO: Yeah, so we have been talking, my partner and I, about maybe trying to find second jobs, even just seasonal stuff for the holidays. You know, he tutors for English as a second language online and he did that in the past. And, you know, he could always pick that back up if, you know, if it came to that. Me, I’ve been trying to really focus on work and you know, can I increase my income that way? If there’s ever a promotion coming up and things like that, maybe some retail work over the Christmas season? I don’t want to. But you know, if it comes to that, I guess it’s something to consider.
ROMA: It’s taken a toll on his mental health.
OTTAVIO: We try to keep a positive outlook, I guess, on things. But it’s hard. And, you know, I’m reading all the business columns and the financial advice columns. I listen to, you know, all these shows and podcasts and Bloomberg News and all of that, which I had never really done. I’m not really a numbers guy, but I have to try to keep on top of it and see what’s coming. So that and also, I mean, it’s affected, I would say, my mental health in the sense that I know when the next rate decisions are coming up. And I kind of brace myself, I do that kind of, internal work of like, okay, it’s coming, it’s going to happen. It’s still happening. It does keep me up at night.
ROMA: Ottavio and his partner don’t plan to lock in now because switching to a fixed would mean a rate of 7.5%. He’s hopeful rates will come down in the next five years, but going forward, he wouldn’t get a variable rate mortgage again.
OTTAVIO: Yeah, I’m definitely going to put more of an emphasis on stability, predictability and just take in account how much my mental health is worth to me? Basically, it’s worth 1 to 3%, probably. So I’m going to make that more of a factor in my decision for sure, and really put a price on your mental health. And what is it worth to me and to us as a couple?
ROMA: Next up, we speak to a guest who’s made peace with his variable mortgage.
NICK: My name is Nick. I’m 34 years old and I live in Waterloo, Ontario.
ROB: Nick started house hunting in January 2021 when interest rates were historically low. In April, he paid $630,000 for a house that was listed at just under $500,000.
NICK: By the time I found this house, I’d already put offers in on two other places, and I was beaten out really because of financial reasons. Most of the people that were bidding on the other properties were families. So multiple incomes. In this case, I had actually overlooked this listing because the pictures weren’t the greatest. The description was pretty minimal compared to the other properties I’d looked at, and they made no mention of the basement except to say “there’s a side entrance to the basement”, but there were no pictures of it. It was when I actually came to the house to see it after kind of feeling defeated from bidding on the first two, I came with my uncle and the real estate agent and we took a look around and I went straight down to the basement following my uncle because he was checking for structural integrity and just any leaks or anything like that. And as soon as I came down the stairs and came into the finished half of the basement and the rec room, I just went, “Wow, this is it. This is my music space”. This is what I needed in my home. I had to put an offer on the home without conditions because that was the style at the time. A lot of people were just putting offers in to get a property and waiving conditions because it was seen as something that would count against you in the bidding process. I had heard that there were, I think, between 15 and 20 other bidders on this place. But I think the thing that scared me the most was putting an offer on it without any conditions, not knowing if I was going to end up in the same horror story that other people do where they buy a property and then end up having to sink tens of thousands of dollars for important repairs and just things that they would need to be fixing down the road.
ROB: Nick’s mom and stepdad cosigned the mortgage with him so he could get approved for the purchase price. He used a mortgage broker to find a rate.
NICK: And so I ended up going through her. She was able to give me a variety of different rates, talk me through the options and ended up settling on a particular bank that had a really aggressive variable rate at the time. When I was talking with my mortgage broker, she was giving me a lot of information about different reasons why people would choose variable versus fixed rates, and why it might be a calculated risk to go for a variable rate knowing that interest rates may go up over time. And she herself has a variable rate right now. And so I kind of trusted her opinion that, yes, it’ll fluctuate, it will go up and down, but you might end up in a better position compared to locking in to something three years from now if the variable rate ends up becoming lower. When comparing the fixed versus variable rates, I remember that the variable was 0.99%, which seemed really attractive compared to a few other quotes I saw, and the fixed rate was around 1.5%. Looking back now, it’s laughable because I think I should have locked in, but who knows what the future will bring as far as the interest rate fluctuations.
ROB: These days a fixed rate of 1.5% would feel like winning the lottery. Nick’s well aware of how different the environment is now.
NICK: Unfortunately, I have a very good sense of how the rates have changed since I bought. One thing that I noticed is compared to the 0.99% variable rate that I started with, the rate is up at 3.99%, and I’m one of the lucky few from talking to colleagues and friends where the monthly payments haven’t actually changed for the same amount of money coming out of my bank. I’ve been able to budget for that effectively, and I’m really happy that my payments haven’t gone up. And when I look at the bank statements and look at the payments coming out in the app, 25% of my payments are going to the principal and the rest is all interest, which is pretty depressing when I think about it. I chose a 25 year amortization and I know when reading through the paperwork, one of the stipulations was that if the variable rate ended up going up quite a bit, the bank would compensate by extending the amortization period. I would expect I would get a letter telling me if something like that was going to happen, and I believe they have to give me notice before increasing payments. I want to try and put additional money down as much as I possibly can just to offset those payments.
ROB: Looking back, Nick understands why he chose the variable rate, even if he might do things differently next time.
OTTAVIO: The very first piece of advice that I maybe should have taken right away was when I was talking to my old boss. He’s sold, bought and sold a lot of properties. And so he’s got his finger on the pulse as far as real estate. He mentioned to me that when I told him the variable rate was and I told him what the fixed rate was when I actually got the mortgage initially right away, he said, “Oh, buddy, you better lock in immediately.” And I said, well, my mortgage broker suggested I wait because I’m not sure what’s going to happen. He gave me some words of caution at that point. And in a way, I do wish I had locked in, but I think that would have increased the monthly payments right off the bat. And so when I was weighing the consequences of both of them, and I kind of did long term calculations, I love my spreadsheets for that. It just seemed to make sense to me to really take a chance on the variable and just continue trying to save as much as I can in case payments do go up. If I could go back in time, I would tell myself to lock in just like my former boss did. I think seeing the way that the markets changed now and just watching the rates rise, talking to other friends that have been looking at property now, the affordability is being pushed farther and farther out and less people have six figure incomes on both sides of the couple. So I would definitely tell myself, I’d give myself a slap on the head and say, you should probably lock in. It might not seem like a great idea now, but think about what may happen in the future. Think about the evolution of the pandemic and the economy. I’ve only just started really delving into investing short of my RRSP and putting money aside in TFSA’s, and I think that’s caused me to look back on the decision I made around the mortgage and think I may have played it differently.
ROB: For now, Nick’s happy to ride the wave.
NICK: I’m in sales, so I know all about volatility and things. Working out, not working out. You win some, you lose some. I just think despite everything that’s been happening and talking to friends, and I have two good friends that are shopping right now for a house and they’ve put an offer in and it looks good for them. They were lucky because they got to put conditions on their offer, which I don’t think I would have had a chance to do. But now, as I said, I’m just thrilled that I’m here. I don’t care what else is happening. I’m locked in. And this isn’t an investment so much as I bought this house because I want to live here, not because I’m trying to make money off of it. My step dad kept saying that to me when I was shopping. He just said, If you’re shopping, make sure you’re buying a place because you want to be there. But I have other people telling me, oh, you’ve made money on the house. Good for you. I haven’t made any money if I’m in the biggest debt of my life. Either way, it’s a debt that I feel is a rite of passage in some way. So I guess you could say I’m happy to have put myself in this large debt because I get this I have control of the space. And if I want to sing at the top of my lungs or turn up my guitar amp, I can. I think if I was shopping now, I don’t think I’d be able to do it. I think I’d be pricing myself out as a single income as well. But I would really love to see the correction continue downward because I want to think that other people my age are in the same position that have been saving, maybe that are ready to move out from where they are and want to plant their roots. I like to think that people will be able to do that and be able to actually start spreading their wings or I guess plant their roots in an area where they can actually afford to live and not have to travel so far outside of the city where they’re away from their friends and family, away from entertainment, just away from arts and things that they like to do. So while I do hope that this correction happens more quickly for the sake of other people in our generation, well, all I can say is I do think it’s a good thing. I’d love to hear more success stories from people being able to find a property that they love and really have a chance to settle down before it’s too late.
ROB: Nick actually reached out to the Stress Test team recently to let us know that he got a letter from his bank saying he’s approaching his threshold rate. He’s expecting his payments to go up soon.
ROMA: After the break, we’ll hear a story from a couple who was finally able to buy a home during this latest period of lower real estate prices and higher interest rates.
ROHIT: My name is Rohit. I’m 33 years old and I live in downtown Toronto.
ROMA: Rohit and his wife had been looking for a house in the GTA since before the pandemic.
ROHIT: In terms of bids, numerous times, yeah. We must have put in, I mean, we’ve never explicitly counted, but I would say probably 30 bids over those three years. And you know, obviously, I mean, didn’t get any of them up until, you know, the one that actually worked out. So it makes us a little bit unique, I think, in that we have seen almost a full cycle, you know, in 2020, 2021, as the market was going going parabolic, we just tried to be cautious in our approach and that was actually part of the reason why we didn’t end up buying a house because we were just certainly behind the market.
ROMA: Despite the frustrating conditions, the two never considered settling for something they didn’t love just to break into the market.
ROHIT: Our philosophy through the process actually was more about being completely okay, but waiting, you know, building out our savings and buying a house when we felt comfortable buying it. But when we felt comfortable buying it based on external conditions as well as just where we were in our life the way it was in 2020 and 2021, I would describe it as basically there was a lot of FOMO, right? It was just like, that’s literally the only way to describe it. And we’re kind of lucky, my wife and myself and that, you know, we’ve been sort of healthy in terms of the personal finance habits that we follow. And we’ve always known that falling prey to FOMO, not just from a household standpoint, but in any aspect of your financial life, is generally, you know, not a recipe for success. And as frustrating as it was because we were constantly behind the market, w were very adamant about, you know, not buying something for the sake of buying something. You know, we said we’ll keep trying and hopefully the market will give us an opportunity to get the right house at some point. But we certainly did not want to settle for something less than what we had in mind initially or stretch ourselves more than what we wanted to.
ROMA: Even though house prices kept climbing. The two felt confident that they would eventually come down. All they needed was to remain patient.
ROHIT: We certainly felt that the market would turn and that we would see a significant correction at some point. And the reason for that is my wife and I both work in banking and the investment field. And we felt like prices in Canada, home prices, I mean, were just unsustainable based on very fundamental metrics, home prices vs rent, for example, a home price vs disposable income. And any time something goes up in a parabolic fashion and it has been going up like that for four years, there’s going to be an inevitable reversion to the mean. What we didn’t know was when it was going to happen, because it could have happened in five years from now, ten years from now. We just had no clue about the timing of it. And so our mindset around it was, we will rent for as long as we can. And hopefully at some point the market gives us a chance to jump in and get something at an affordable price.
ROMA: As interest rates kept steadily climbing over the last year, Rohit noticed a big change in the house hunting experience.
ROHIT: In terms of the process? Yes, I think there was a sort of night and day difference, in terms of how the market is now. And if I were to compare it to a year back or two years back, you know, in 2020, 2021, we would go to see houses and there would be numerous buyers. There was no question of putting in an offer with a financing commission or an inspection clause because you just knew your bid wasn’t going to be taken seriously. Whereas now in the most recent months we would go to see houses and there was a palpable sense of just lack of interest from buyers and that you were competing with a much smaller pool. And so, that allowed us to be very prudent in how we went about looking at houses, how we went about putting in our bids.
ROMA: After nearly three years of searching, Rohit and his wife bought their first home in September. They took possession at the end of November.
ROHIT: So the house was listed for $1.278 million and we bought it for $1.2 million. And I actually put bids on houses where we would sort of put our little, you know, conservative bid and then we’d see the House go for 300,000, 400,000 over the list price. And that’s the period when we thought the market was just, insane in terms of what was going on in our case specifically. We bid significantly below asking, we started with a number that was about 10% lower than the list price. And then obviously there was some back and forth. The buyer wanted more, we wanted to stay within our budget. And so we finally came to a consensus price at one point that worked for us and for the seller.
ROMA: Of course, the trade off to lower house prices is higher interest rates. But Rohit is okay with this. When it came to picking a mortgage, he chose a more conservative fixed rate.
ROHIT: So we’ve locked in for a three year term at 4.69%. It was more about peace of mind, knowing exactly what our rate was going to be over the next three years. I work in the investment field, but I can tell you that we’re not sort of experts in knowing where interest rates are going to go. And so rates might go up. They might go down over that three year period. We’ve made peace with the fact that there might be a situation or scenario where over the three year period we actually end up paying slightly more on a fixed rate than what we would have if we had gone with a variable rate. But I think that that’s something that’s still worth it because it allows us to sleep at night and it gives us peace of mind knowing that we don’t have to worry about what inflation is doing or what the Bank of Canada is doing for the next three years. So it was more of a behavioral decision as opposed to an optimally correct or mathematically driven decision.
ROMA: Besides the lower price of the house, Rohit says there were other benefits to waiting.
ROHIT: The fact that we waited to buy has now allowed us the luxury of buying something that is significantly bigger in terms of size. And that’s something that we feel fortunate about because obviously over the last two years, three years, we’ve had the chance to build up a greater down payment. We’ve progressed in our careers and the market, given that it’s a little weak at the moment, has given us the opportunity to buy something a little bigger. And that’s important for us because it means that we are not going to be forced in three or five years to move because we want a bigger size. So it just helps us avoid transaction costs, land transfer costs, a number of other intermediary costs, because now we have just got the opportunity to buy a house that we can hold for hopefully a very long time and not have to consider moving because of size.
ROMA: It sounds like Rohit and his wife have made a smart move. They bought a house that they can grow in, that they can hold on to for a great number of years and some place that they can call a home. Rob, what are your takeaways after hearing these stories?
ROB: 1) House prices are falling in cities across the country. Mortgage rates are at elevated levels, but there’s a chance to get into the market at prices well below the peak. 2) Stop beating yourself up for housing decisions already made. Variable rate mortgages will be more manageable when interest rates fall and house prices are coming back at some point. No doubts there. 3) The pain of higher mortgage rates won’t last. There are already signs that we are near the peak for rates in the final stretch of 2022.
ROMA: Thank you for listening to Stress Test and a big thank you to Ottavio, Nick and Rohit for joining us for our very last episode of this season. The podcast was produced by Kyle Fulton, Emily Jackson and Zahra Khozema. Our executive producer is Kiran Rana.
ROB: You can find Stress Test wherever you listen to podcasts. If you like this episode, please give us a five star rating on Apple Podcasts and share it with your friends.
ROMA: Somehow, Rob, we’re done for another season, but don’t you worry, we’ll be back to talk about money in the New Year.
ROB: Until then, find us at the Globe and Mail dot com. Thanks for listening.