How To Navigate A Move Up The Property Ladder
Dear Happy Homeowners:
Did you purchase what you thought was your 'forever home', only to realize you want an upgrade? Or did you always plan to build equity in your current home with the intention of climbing the next rung on the property ladder? Whatever the case, if your current home is no longer able to accommodate your needs - and your renovation options have been expended - this piece will help better prepare you for being homeowners who are also becoming house hunters!
Clearly, the madness of the property market in Toronto over the past decade has, among other things, changed the shape and direction of the traditional property ladder. With rising prices, a lack of available stock, along with demographic pressure (i.e. Baby Boomers not vacating their homes at the same rate as first-timers are trying to get a foothold in the market), we’ve collectively had to rethink the progression of property ownership.
I talked about this in detail in Urbaneer’s Winter Forecast for 2019, as this is such a timely topic in our current market. Here is a snippet of my observations on how the climb up the property ladder has changed out of market necessity:
“While there was a time when you might buy and sell a condo (or two or three) with the objective of locking down the prize of some centrally-located freehold bricks and mortar, the gap between incomes and property prices are now at a level that affording a freehold dwelling is financially prohibitive for much of the middle class. As I wrote in Dear Toronto Real Estate: Where Are The Property Listings?, the poor condition of our century-old housing stock along with the shift from flipping to new builds is reducing the stock of houses that are both affordable and habitable for climbing the property ladder; the expense of parenting, including daycare and millennial underemployment; stagnant incomes is hindering the capital creation necessary to make a move, along with the prohibitive closing costs associated with each buy and sell.
For those who do secure a house, it's increasingly likely it will be the only house they buy, which will get renovated while the owner(s) career-path. Rather than incur the small fortune it costs to buy and sell to climb the property ladder, instead, they'll expand it with an addition up, down or out as their equity and incomes increase. (Check out Should I Renovate My House In Stages Or Do A Full Gut?) Then one day - if all of their laughing, barking brood aren't still living at home when they're 65 - perhaps they'll downsize and reap the rewards of their investment.”
That said, even with this shift (and depending on your individual situation), now may be the ideal time to make your play up the ladder in a more traditional climb. Additionally, there are certain criteria that all potential property ladder climbers should determine before they make their move up.
Check Your Financial Health
What is your financial situation? Before you make your housing wish list, especially in Toronto where housing prices are high in relation to income, it is a good idea to have a financial health check. Your financial situation is more than just how much money you’ve got in the bank or what you think you might be able to afford in terms of mortgage payments.
Is your credit in good shape? This will determine not just how much money you can borrow, but what kind of interest rates you will qualify for. Have you been able to put away savings and manage your household budget well with your current home? If there have been challenges, now is a good idea to revisit your money management strategies.
Be aware that moving up the property ladder in Toronto may be more costly relative to other cities; I broke these costs down in detail in my forecast!
What Is Your Budget?
Could your income support an increase in mortgage payment if you are buying a bigger home or upgrading your housing type? If you are already scraping the top of your debt ceiling to afford your current home, it might not be a wise financial move to load more mortgage on to the debt pile. Don’t forget that interest rates have increased and are predicted to increase again - possibly this year (and likely in the longer term as well) - which will increase your carrying costs.
Determine what sort of new mortgage payments that you can reasonably afford and then use that as a starting off point for your home search.
And don't forget... a house requires never-ending maintenance and repairs which can be a hefty on-going expense! Unlike condominium ownership where the corporation that you pay your common fees to has a legal obligation to ensure it is saving sufficient funds to repair and replace all commonly owned building components when required, the cost of keeping your house warm, dry, and healthy is exclusively your own expense. And I can assure you that if said property is fifty years or older, then you can probably count on it costing you at least $7500 a year in maintenance and repair, as well as some unforeseen costs that typically accompany a vintage property which we rarely think about. I explore this in my post called What Is And Isn’t Covered In A Home Inspection?
How Much Equity Do You Have?
Typically, when you are planning on moving up the property ladder, you’ve got a fair bit of equity built up in your current home. This is key because it will either help you to extend your housing budget by increasing your purchase power or if you are looking to keep your mortgage payments in a similar range, it can help to increase your down payment for your next home.
With all of the costs associated with homeownership, it can take some time to build up equity. In fact, it takes anywhere from 5-7 years to break even on a home purchase, assuming the market is increasing at a balanced rate. However, in your situation, the condo market has been very hot which has resulted in an opportune time for you. With the government interventions in 2017, and the more recent stress test requirements, and even the increase in interest rates, it's funneled buyers keen to purchase property into the less expensive condominium market rather than the freehold housing market. What resulted was a fast escalation in condo values. This has resulted in a significant equity growth for you, like many condo owners, who purchased three to five years ago. In that short window of time condos like yours - which were purchased in the $500,000s - are now selling in the $800,000s+! You can now sell your first property purchase and clear $300,000+ in capital for your next buy. And given freehold houses have remained fairly stable and in line with the peak values attained in April 2017 values (in the year prior house prices went up 30%), what would have been prohibitively expensive at one time is now 'affordable' for you. In fact, had the government not intervened, the low rise / high rise price gap may have continued broadening, leaving two distinct markets oscillating under their own accord. Instead, this massive financial gain for condo owners is enabling the filtering of condo buyers into the freehold housing market. In fact, it's been an opportune time for condo sellers to become freehold housing buyers.
However, before you sell, I always encourage you to increase your potential profit as much as possible through cosmetic renovations. Certain renovations carry more return on investment than others, which can help to guide you with your renovation dollars. I share some tips in this piece called Maximize The Value of Your Condo With Smarter Upgrades.
Of course, one of the best ways you've increase your condo’s value was choosing to purchase it. The growth of your home’s value is its proximity to valuable amenities: including public transit, shopping and entertainment, green space, good schools, and some very cool cafe culture. These are factors all Buyers should take into consideration when looking for a new home. Better still, you should get top dollar because we searched for a property which has a unique- thoughtful space plan, on-trend finishes, generous outdoor space and deeded parking, which will make your home stand out among others when it comes to resale.
Will You Need To Renovate?
Given the age of the housing stock and the high prices of houses, it is entirely likely that a home purchased on a rise up the property ladder will require renovations, either for structural integrity or to update with modern finishes and lifestyle (or both). Do you have room in your budget to support these renovations on top of your intended home’s purchase price?
Consider as well what sort of timeline you might be using to complete these renovations. If your budget only allows you to do renovations in piecemeal fashion, are you ok with what that entails?
If you're considering taking on a property that requires some significant renovations, I recommend all couples read this post first: Dear Urbaneer: Help! We Want to Renovate, And Keep Our Relationship Intact
Is There Housing Available That Is Suitable?
Another pragmatic question is - what is available to you currently in the market in your price range? Does it appeal to you? Is it a “move up’ from where you are now? If there isn’t much available on the market, that hits the mark for you, don’t rush into a purchase.
Be sure to read this post about home inspection and what to look for when touring a home: Dear Urbaneer: What Is And Isn’t Covered In A Home Inspection?
On the other hand, from a market perspective, there is the possibility that the recent moderations in the property market may present opportunities for home buyers who have strategized their move up the property ladder and have already determined that a move up makes sense financially and pragmatically.
As I said in my forecast:
“There are two rules of thumb when it comes to buying real estate. One is 'buy when no one else is' and the other is 'the best time to climb the property ladder is in a declining market’. If the dynamics of the real estate market do shift from price appreciation to depreciation, it will result in Buyers having more choice in the available supply specific to their wishes, wants and needs (and budget) - and that motivated Sellers will have to drop their prices in order to remain competitive to secure a sale.
To 'buy when no one else is' offers greater opportunities to negotiate, cherry pick distress sales, and wait for the perfect property which has fewer compromises. The only risk is that prices continue to drop for a period of time after you buy, such that you have to wait for prices to increase and rise around 7 per cent over your acquisition price to break-even after buying and selling costs.
It's also feasible that specific market segments may be impacted first, with prices adjusting downward - due to smaller pools of buyers for a particular niche - like certain housing types, locations or price points. For example, prices may drop for luxury real estate, outer ring suburbs, new home sales being sold pre-construction, or recreational properties. Even this past year we've seen suburban freehold housing decreasing in value while houses in the central part of Toronto are stable if not increasing moderately."
There is a lot to consider when you are weighing the pros and cons of moving up the property ladder. It’s wise to do all of your research and contemplate all scenarios when you’re charting your housing path. We’re here to help you on your home ownership journey!
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Contact me - Steve Fudge the purveyor of Houseporn.ca and the proprietor of Urbaneer.com at - firstname.lastname@example.org for more info!
~ Posted by Steven Fudge, the purveyor of houseporn.ca and proprietor of Urbaneer.com, a division of Bosley Real Estate Ltd., Brokerage.