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Is it a good time to buy now during Covid-19?
August 23, 2020 | Posted by: Danny Duong
I have been asked this question a lot lately as we continue to navigate through the unprecedented effects that Covid-19 has had on our health, livelihoods, and personal priorities. What has spurred this question or thought? For starters, the pandemic has kept many of us cooped up at home for the past 5 months so the thought of maybe it is time to upsize into a larger home is now a serious consideration. Companies adopting long term work-from-home strategies may have also suddenly made the idea of amoving further away from Metro Vancouver where prices are more affordable a feasible option as well. Add to this historically low mortgage interest rates, which are projected to stay low until at least 2023, and it’s not so surprising that real estate sales rebounded in June & July after a dismal April & May. But is it a good time to buy now? It depends!
The pandemic has created a tremendous amount of uncertainty due to the negative impact on our economy (thousands of business closures and job losses). If you are a pessimist (or realist) then you would be inclined to argue that the real estate market will collapse with huge price drops once government financial assistance and mortgage deferrals end while high unemployment persists. If you agree with this forecast then you will say wait for the crash before buying. But why has there been such a marked recovery in real estate activity and sales in June and July? The answer is pent up demand from the months March-May, record low interest rates, and quite frankly people whose life circumstance requires them to move forward with buying now. But for those who are still on the fence – what should you do? Is it a good time to buy? The answer again is it depends (sorry if you thought you were going to get a clean answer). Ask yourself the following questions and be honest.
The obvious consideration right now due to Covid-19 is how stable is your employment or ability to earn income right now? If you are employed by a company, what is the probability of you getting laid off? Or if you are self-employed, what type of business are you in and how has Covid-19 affected your business? Answer this honestly since you want to make sure your income will be stable to pay the mortgage each month. This will also be the first question any mortgage lender asks if you come to them for a mortgage right now.
Where will your down payment come from? Will it come from your own savings, RRSPs, borrowed from a line of credit, or perhaps gifted from family? Make sure to budget so that you will still have a reasonable amount of liquid assets on hand in the event of reduced income (perhaps from reduced hours at work) or other unexpected expenses. You do not want to deplete all of your savings or cash out all investments for your down payment. It would be stressful if you do not have any savings to fall back on during rough patches.
Have you developed a clear budget and lifestyle review? Make sure to review your budget to determine what would be a comfortable and reasonable monthly mortgage payment you could afford. Keep in mind the lifestyle you want to maintain such as dining out, movie nights, vacations, lessons for the kids, etc. Work backwards and determine what that idea mortgage payment would be for you – will it be $1500 or $2000/month? Don’t forget other housing costs such as utilities, property tax, and strata fees in the case of condos and townhouses.
Are you buying a primary residence or an investment property? If you are buying a home to live in for the next 5-10 years then it is very different from buying a rental property that you do not plan to keep long term. Despite a significant drop in sales volume in April & May, prices did not drop in Metro Vancouver at all. For example, the benchmark price for a detached home in Metro Vancouver held stable and actually increased five per cent in July (compared to July 2019) and increased by 0.9 per cent compared to June 2020. Real estate has its cycles with prices affected by both demand & supply going up and down. Everyone wants and hopes to time it perfectly so that they buy low, enjoy significant appreciation in the value, and perhaps sell for a healthy profit and repeat. But the reality is any fluctuation in value in only on paper unless you sell thus the question of are you buying it as your long term primary residence or as a short term investment?
The bottom line is if you have a stable source of income, have the necessary down payment, can afford to commit to a mortgage while maintaining the lifestyle you want, and are buying a home to live in for the long term then it might very well be the right time to buy now.
If you are a first time buyer with a 25K down payment (the minimum) for a purchase of a 500K property, your monthly payment will be in the range of $2000/month at current mortgage interest rates around 2%. In 5 years, you will have established approx. 20% equity in your home assuming a flat market with little to no change in the market value at all. For the first time home buyer in this scenario, homeownership is a type of forced savings or wealth building you would not otherwise attain if you continue to rent (and pay someone else’s mortgage).
If you are an investor looking to purchase a rental property and have a large enough down payment that the property generates a positive cash flow then perhaps it’s still a good time to buy as it adds another stream of passive income.
On the other hand, if you are a speculator merely looking to flip a property for a tidy profit in the midst of a global pandemic with no clear end in sight then the answer to whether you should buy now is not as clear.
With those points in mind – the decision to buy now (or not) is a highly personal decision. One that, in my opinion, requires careful self-assessment closely tied to the stability of your personal finances, employment, lifestyle priorities, and ambitions.