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November 11th, 2019 
Judi Kohn

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When Is The Right Time To Buy In A Changing Market?

There's no question that Toronto's real estate market is declining right now.  The volume of sales is down and the average sale price is down.  With the benefit of hindsight, we can clearly see that the market made a major shift starting slowly in August and then accelerating in October thru December.

So, how does a buyer currently in the market to purchase a house or condo in Toronto, without the benefit of hindsight, make a good decision as to when to buy?

Toronto Market Curve Graph

Toronto Market Curve Graph

Taking a look at the Market Direction Curve diagram above, let's say we're at A right now and the market is trending downward.  The problem is predicting what the length of time (X) is between today (A) and when the market is already on the way up (B).

Everyone would LOVE to always buy anything right exactly at the bottom BUT we never know where the bottom is until the gift of hindsight steps in and tell us the curve is now going up!

So let's say that the time between today (A) and the bottom of the market is 12 months.  We probably wouldn'd know when that bottom value was reached until we reached B, maybe 24 months from today. 

Of course the value line may not be linear like this one BUT, for the sake of argument, let's say it was.  And, let's say the decline in value from A to the Bottom was 10%.  Then that value would have been recovered by the time we reached B. 

An additional factor to consider now is the low interest rate on a typical 5-year term mortgage (currently 4.99%).  The reason it's so low is because of the state of the current economy.  As the economic climate improves, the Bank Of Canada and the commercial banks will shift focus back to fighting inflation and interest rates will increase. 

The end result in 18-24 months from now will almost certainly be a 5-year term rate in the low to mid sixes (a $3,000/year difference in payment for a typical $300,000 mortgage)!

So, by waiting for 24 months to make a purchase, a home buyer would not be ahead at all.  In fact they would be behind since they've still had to pay rent for that 24-month period.  That buyer would not have reduced the principal of their mortgage plus an increase in rates from today would have reduced the size of mortage they would qualify for and their annual PI payment would have increased!

Remember... most people buy homes and stay in them for 5-7 years and today's economic malaise will pass in just 12-24 months. 

You can easily see that it makes sense to buy a home in the next 3-6 months (towards the bottom of the curve) and thereby take advantage of today's lower interest rates, the current flexibility in seller's prices and know that home prices 5 years from today will certainly be higher... even if that number is only up by 15-25%!

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