If homeownership is an eventual goal of yours, now might be a particularly advantageous time to begin taking concrete action toward your personal goal of buying a home in Edmonton. While it might seem bold to purchase your first home during a global pandemic, if you’ve been trying to decide whether to rent or buy a house in Edmonton there are a number of factors that make this moment a smart time to purchase — if your finances are in good shape. With the federal interest rate at a near-historic low, many prospective homebuyers will be receiving excellent mortgage rates. Of course, understanding the Edmonton housing market and your own personal finances are also important factors in your decision, too. You’ll need to carefully weigh all these factors.
Is now the right time for you to make a purchase? Here’s how to evaluate if you’re ready to buy a home in Edmonton.
Understanding the Edmonton housing market
When real estate professionals evaluate markets they typically refer to them as a buyer’s market, seller’s market or balanced market. Here’s what those terms mean and how they help you decide if now’s a good time to buy in Edmonton:
- Buyer’s market: There are more homes available than there are buyers — an advantageous time to buy.
- Seller’s market: There are more buyers looking for homes than inventory listed — an advantageous time to sell.
- Balanced market: There are about the same amount of people looking for homes as there are homes available.
So, what metrics do real estate agents use to classify the market? And, what does Edmonton’s market look like in the summer of 2020? Here is the key data and how Edmonton’s housing market looks right now.
1. Days on market
Is now a good time to buy a home in Edmonton? One factor to give you an indication is how fast homes are selling. Real estate professionals will often look at the number of days it takes for a home to sell in order to determine how active the market is at any given time. They refer to this number as “days on market.” The average number of days on market can vary between different types of residences and price points, as well as from city to city. An experienced real estate agent can help you understand the nuances of this metric in your own city, price point, or neighborhood.
In July 2020 in Edmonton, the average days on market for a single-family home was 43, compared to 57 days a year ago. This reverses a trend from the earlier months of the pandemic where homes were lingering on the market about seven days longer than they did in 2019. This could suggest that the housing market in Edmonton is starting to gain some momentum. Keep in mind that the summer months are typically considered the busiest months for real estate, so this trend isn’t necessarily guaranteed to continue into the fall.
2. Average sale price
You’ll want to compare in which direction sale prices are moving to help determine how healthy the real estate market is in your particular neighborhood or city. If the average sale price is declining, this could indicate a buyer’s market.
The average sale price in Edmonton in July 2020 for single-family homes was $436,000. This is 1.39% higher than the average sale price a year ago. While the price of a single home decreased by about 5% year-over-year during the height of social distancing, the housing market seems to have rebounded to pre-pandemic levels. In fact, the number of monthly sales echoes this — there were 13.53% more home sales in July 2020 than there were in July 2019.
3. Sales-to-listings ratio
To get an idea of how much demand there is in a certain market, real estate professionals often look at how many sales there are in a given month compared to how many listings. If the sales-to-listings ratio is 60% or higher, this is typically classified as a seller’s market. That means for every ten houses listed, six are sold. A ratio between 40% to 60% typically indicates a balanced market, while anything below 40% is a buyer’s market.
In Edmonton, in July 2020 there were 2,165 homes sold, compared to 3,215 listed. That’s a sales-to-listings ratio of about 67% — indicating the market is leaning slightly toward a seller’s market.
4. Months of inventory (MOI)
Another metric to consider when trying to classify a housing market is how many months it would take to sell all the inventory at the current rate. This is referred to as months of inventory (MOI). In a seller’s market, there are about four months of inventory or less. A balanced market has between four and six months of inventory and a buyer’s market has more than six months of inventory.
In Edmonton, there are currently 7,174 homes on the market, and homes are selling at a rate of 2,165 per month. That means the MOI is just over three months — indicating a seller’s market.
Should you buy in a seller’s market?
You can still buy a house in a seller’s market. While you might want to resist buying if there is a strong seller’s market, the Edmonton housing market, recovering from the COVID-19 pandemic, is only slightly outside the bounds of a balanced market. A recovering seller’s market like this doesn’t necessarily indicate it’s a bad time to buy — it could just help you set realistic expectations when it comes to your wish list or budget.
For instance, because you know the market leans more toward the seller, you might be more inclined to sacrifice size or neighborhood to get other necessities you were hoping to have. You might also be more motivated to act quickly when you find a home that suits your parameters.
Consider local economic indicators
Chances are if you live and work in Edmonton you already have a feel regarding what’s happening with the local economy. However, there are a few key aspects to think about strategically if you’re going to buy a home right now. Here’s what you should consider and why.
The federal interest rate can have a huge impact on your decision to buy a home. Banks use the federal interest rate to help set the prime mortgage rate they charge their customers. The riskier of a borrower you are, the greater percentage above the prime rate you will be charged. If you are considered a prime borrower, a low federal interest rate can be particularly helpful to you, but even if you don’t have prime credit, you still stand to benefit from a lower federal interest rate.
The federal interest rate set by the Bank of Canada is currently at a near-historic low of 0.25%. The Bank of Canada has indicated this will continue until about 2023 while the economy recovers from the COVID-19 slowdown. Now could be a good time to take advantage of the interest rate.
If you don’t have good credit or feel financially ready to buy a home, you might consider spending the next few months preparing your finances and repairing your credit so you can take advantage of the interest rate before it increases.
Of course, you’ll want to consider the unemployment rate to understand how it could impact your own finances. Are you in a particularly recession-proof job? Or, do you feel at risk due to the economic downturn brought on by COVID-19?
If you’re buying a home in Edmonton, however, there’s an additional reason to consider the unemployment rate. Many first time home buyers in Edmonton opt for houses with basement or garden suites so they can act as landlords, using the collected rent money to help cover the cost of the mortgage.
While this savvy financial strategy is common in Edmonton it relies on a thriving rental market. The unemployment rate in Edmonton increased to 13.6% in May 2020, up from 10% in April. If the unemployment rate continues to climb you might find it difficult to get the amount for your basement or garden suite that you’re hoping for.
Assess your personal finances
One of the most important aspects of deciding whether or not to buy a home is knowing if you’re personally ready. Your personal finances play a huge role in whether or not homeownership is a wise decision right now. Here’s how to assess your financial situation and decide if a home is the best thing for your current budget.
Qualifying for a mortgage
A mortgage is essentially a large loan using your home as collateral. You’ll agree to a certain interest rate and a certain term for the loan — usually between 15 years and 25 years. Once you sign for the loan, the funds will be transferred to the seller through your lawyer and you will begin to owe regular monthly payments. If you fail to make these payments, the lender has the authority to foreclose on your home — which means they will own it and sell it to recover their costs.
When getting a mortgage you want to make sure that you’ll be able to keep up with monthly payments. Your interest rate and the length of your loan work together to help determine what your monthly payments will be. If you feel your monthly payments are too high to fit comfortably within your budget you can lower them by extending the length of your mortgage.
Alternatively, you can opt to work on improving your credit score so you can qualify for a better interest rate, which will also reduce your monthly payments. In some cases, a personal loan can help you do this — if positive payments are reported to the credit reporting agencies, this is one factor that can help raise your credit score.
Financial experts recommend that your mortgage payment costs no more than 25% of your monthly income. Remember, you’ll have additional monthly housing costs on top of the mortgage.
Making a down payment
The minimum down payment for a home of $500,000 or less in Canada is 5%. That means if you’re buying a $300,000 home, you need to save at least $15,000 for the down payment. This is the minimum amount, but your lender could choose to increase this — especially if you have poor credit or are self-employed.
Additionally, if your down payment is less than 20% of the price of the home, you’ll need to purchase mortgage default insurance, which is calculated as a premium of 0.6% to 4.50% of the cost of your mortgage.
Are you ready to buy? Ideally, you will have saved more than 20% of the purchase price of your home for a downpayment so that you can avoid the mortgage default insurance premium.
Saving an appropriate emergency fund
Financial experts typically recommend you have savings that are big enough to cover about three months of expenses. This is especially important when you become a homeowner because repairs and maintenance costs will inevitably arise, and you don’t want to be stuck using your credit card to pay for these expenses. As a renter, you typically have fewer emergency housing costs as your landlord will typically cover most repairs. When you transition into owning your own home, the responsibility of these costs will fall to you.
If you don’t feel like your savings fund is big enough to safely purchase a home now, there are a number of steps you can take to quickly boost your savings before you take the plunge.
Budgeting for monthly costs
Your mortgage won’t be the only monthly housing cost to consider when you’re a homeowner. When you’re deciding between renting or buying a home in Edmonton you’ll need to take a look at your total budget and all the extra costs associated with owning a home. Here are some other property costs you’ll have to budget for each month:
- Home insurance
- Property taxes
- Maintenance such as snow removal or lawn care
- HOA fees if you buy a condo or in some gated neighborhoods
When you create your personal financial budget you’ll want to make sure you account for all of these and that your housing costs combined with your mortgage, are no more than 30% of your monthly income.
Paying for renovations
If you’re buying an older home that you want to (or need to) renovate before you move in, you’ll also want to budget for these renovations in your total housing costs. Renovations can easily add up — here’s what you can expect to get for $50,000 in renovations.
This is something to consider before you purchase, as it could impact what type of home you go for. Buying a home that “needs some work” because it’s cheap might actually actually cost you more in the long run. If this is the only type of home you can afford right now and you aren’t sure how you’ll pay for renovations, it might be better to rent until you are in a more financially secure position.
Deciding what’s best for your situation
As you can see, there’s no magic eight ball that can give you the answer about whether now is a good time to buy or rent. This nuanced decision is based on a combination of market factors and your personal circumstances. While now might be a good time to take advantage of the lowered federal interest rate, there could also be wisdom in taking the next six months to get into a more secure financial position before taking the plunge. Interest rates are likely to remain low for a while, although the seller’s market in Edmonton could continue to strengthen.