Your life, like mine, has been cast into upheaval these last couple of weeks. In some ways, life has simply been put on hold; in other ways, it’s chaotic.
A health pandemic has become an economic pandemic, with everyone hurting in one way or another. Those of us connected with rent 2 own are no different, both we providers, and our tenant-buyers.
So I’ve devoted considerable time over the last 10 days trying to understand how this crisis affects our business, affects real estate generally, perhaps how it affects you. I’ve contacted many real estate agents; I’ve talked to several mortgage brokers; I’ve read the briefs coming out from the financial institutions; and, a week ago, I sat in on a 4-hour webinar with a panel of 20 top real estate investors in Canada, giving their take on how this will affect them, and us.
No one has a crystal ball, but there seems to be some consensus. Since most of you have joined this database because of your interest in real estate and specifically rent 2 own, I thought it appropriate to share what I’ve found on this subject.
After coalescing my thoughts, an RBC report on real estate prospects came out yesterday that mostly supported my ideas. I offer them, though, with the disclaimer above: I do not have a crystal ball.
1. The real estate market has slowed way down, almost ground to a halt. Everyone has put their life on hold temporarily. How long is temporarily? Who knows? I’m pretty sure the bounce-back will be much quicker than from an economic downturn that was initiated by economic issues, as in 1929 and 2008. RBC suggested perhaps the rest of this year, so that would be about a 9-month term.
2. Despite the above, home prices are not likely to come down much. This is because both buyers and sellers have pulled way back. Home prices decline when there is a surplus of sellers, and rise when there is a surplus of buyers. When both pull back together, prices remain stable. I don’t foresee this changing drastically over the term of the crisis. RBC projected just a small drop of 2-3%
3. The bounce back will likely be rapid and home prices rise after this temporary slowdown. This is because the market was gaining steam when this crisis struck; when the crisis subsides, that trend will likely resume, perhaps somewhat tempered by those who will have become economically prevented from re-entering the market. But, again, this will likely affect both buyers and sellers.
4. Though the prime rate has been reduced by 150 basis points (that’s 1.5%) to 0.25%, this has not led to a reduction in mortgage rates. Mortgage rates, other than those variable rates attached to prime, are not based on the bond market, not on prime rate. So, you astutely observe, the bond market has dropped, too. And furthermore, you may recall that even though interest rates are not tied to prime, they have traditionally adjusted in response to prime rate changes.
Not this time. In fact, they have actually gone up. Why? It’s only speculative, but it seems the banks, having agreed with the federal government to be generous with low-interest and no-interest loans in response to this crisis, are offsetting these measures by extracting a little more out of their mortgages. They feel the need to balance their books, too, and somewhere this loss of revenue needs to be offset.
So don’t expect mortgage rates to come down. And, if you’re lucky enough to be in a variable rate tied to prime, enjoy it. But now would be about the worst time to lock in.
5. There is a slight modification of the “stress test” that was scheduled to take effect April 6. The stress test is the government regulation that you must qualify for a mortgage 2 percentage points higher than the rate you will actually get. This has apparently been forestalled. The adjustments were however minor. They may have raised your qualification level a little, but not much; that will still be the case when they go into effect.
6. If you are a renter or a rent 2 own tenant-buyer, you need to do everything possible to pay your rent, seeking whatever help is available. While most landlords are sympathetic and willing to do what is possible to help out, the majority of landlords are very small operators, themselves, who are also hurting at this time. There may not be a lot possible. And, more importantly, you will still need to make up any rent short-fall in the future. It is best to avoid encumbering your future if there is any way you can. This is especially true for R2O tenant-buyers if they intend to succeed in the end.
Is this a good time to get into a rent 2 own?
The answer to that really depends on one simple question: Is your income stream secure during this time?
If the answer is NO, then it is best to hold off until it is secure again.
If the answer is YES, then this is an excellent time to get into rent 2 own. As mentioned, prices have not dived, but the hesitation out there means that we can likely get good buys at this time. And, with the likelihood that prices will soar within the time-frame of a typical rent 2 own, you may be able to realize a good chunk of equity when you complete the rent 2 own term, because your buy-out price is fixed at the beginning of the term and is not based on a soaring market. Several of our rent 2 own clients benefited hugely because of the market surge between 2017 and this crisis.
In the meantime, I want to add my voice to urge us all to take very seriously the steps we are being asked to take to overcome this COVID pandemic. We have seen some glimmers of hope in the past week, at least here in BC, but we are far from over this crisis. It is not time to relax our efforts, but to keep our foot on the gas pedal until this thing is conquered!
Wash your hands! Keep your physical distance! Avoid group interaction!
Stay safe! Stay well!