Eric | Aug. 21, 2019
Could interest rates eventually go to zero in Canada? In other countries banks are in fact offering mortgages with negative interest rates! In Denmark you can get a 10 year mortgage at -.05% where if you borrow $1,000,000 over ten years you only have to pay back $995,000. This is an attempt by Central Banks to stimulate their economies. And the fact is that home ownership seems to be helping us spend money.
In KW we are consistently seeing homes appreciate by about 10% on average each year. We are making a great return on a highly leveraged investment. Let me explain: If you had $100,000 and you invested your money in the stock market (TSX) 5 years ago you would have made 36% or $36,000 OR if you bought a home with a 20% down payment of $100,000 you would have bought a home worth $500,000. If home appreciated 10% per year over the last 5 years you would have made 50% on your investment of $500,000 or more precisely you would have made $250,000. But the kicker is that your $250,000 return is actually on your $100,000 investment. You’ve actually made a 250% return buying a home versus making 36% investing in stocks! (for simplicity I have left out your interest cost to borrow and some other expenses, however, the difference in return is staggering).
So it’s no wonder that the consumer is what is driving the economy. Our homes have increased our wealth and we feel confident spending money. We can always just refinance our homes if we need a little more cash – our $500,000 home is worth $750,000 just 5 short years after we bought it. And if interest rates drop to the point where we are getting paid to buy a home then this cycle will continue. I can’t even imagine what it must have been like to pay 18% in the early 80’s for a mortgage! We are extremely lucky to have this opportunity. We are living in a time where inflation is almost non-existent, the consumer is confident and credit is cheap and easy. The last 10 years have been a gift!
KW has always been insulated. University enrollment usually spikes in a downturn. Insurance companies also do well because you can’t drive without insurance. You can’t have a mortgage without insurance and dying without insurance also sucks. We also happen to be a very nice alternative to a very expensive City East of us. When costs need to be cut, those in Toronto can look to KW for a less expensive alternative. And Waterloo is a Tech hub recognized by the World and Canada has done a great job helping us to attract talent. I read a great article here:
To discuss some of those clouds I think we should all be a little cautious and also be ready to take advantage of opportunities. There are potentially signs that the world economy may be ready for a bit of a breather. We have been riding the coat tails of the consumer – likely because it has been so cheap and will continue to be cheap to borrow money. And with home prices that have risen to help secure credit for the consumer we have had a great run. If home prices move sideways a bit and we see a bit of inflation things could get a little dicey. Currently there is about 15 Trillion dollars ($15,000,000,000,000) worth of negative yielding government bonds in the World. This is a weird idea. Why would anyone pay to stick their money somewhere? Or is it because these investors believe there is more risk of loss investing somewhere else? Here is an article that talks about this:
There are a lot of influences when it comes to US Government bonds and why they are moving in a direction that has typically resulted in a US recession within 12 months. The Yield curve inverted recently – there are arguments for why this time is different. Time will tell.
Sorry. I know. I am link happy this month.
There were 844 properties listed in July – a 12.8% increase vs July 2018. And there 586 residential properties sold – up 15.1%
The Median sale price of properties sold has been on a tear for the last year. We are not at $489,450 – an increase of 10.8%. Lower priced homes are very difficult to find these days!
Single detached homes sold: 322 UP 16.4%
Condominiums sold: 62 DOWN 6.1%
Townhomes sold: 148 UP 45.1%
Semi-detached homes sold: 42 DOWN 22.2%
The average sale price of all residential property in KW: $521,101 UP 9.3%
Single detached average sale price in July: $613,244 UP 5.4%
Apartment Condominium average sale price in July: $339,137 UP 15.9%
Townhouse average sale price in July: $414,062 Up 17.0%
Semi-detached average sale price in July: $434,136 UP 11.9%
Interest rates simply cannot rise. Will they go to zero or negative in Canada? – probably not, but they can go lower. Be aware of your current mortgage term(s) and rates. Rates in Canada have dropped 1% in last 6 months. That is a huge savings. If you want to play ball, go variable with the option to lock in if rates drop. Don’t be afraid to raise some cash – set some money aside or sell a property so that when there is a fire sale you are there to pick up a steal of a deal. Or refinance a property to pull cash out to take advantage of a Real Estate situation.
And like always, I love pre-construction apartment condominiums. I 100% believe that Kitchener is the place to buy apartment rental properties. Condo Apartments at Station Park are coming. We will have access to an allocation of units in this awesome build before anyone else! The Go Train is ramping up travel between KW and Toronto. Google is adding office space and a ridiculous number of people and they need somewhere to live. Station Park is right across the street. One more link 😊
Give me a shout if you want to chat.