Rent or Buy in an Overheated Market?

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Over the past few years, Canadian home prices have risen to such a degree that the affordability gap between buying a house and renting one has grown. You may hear experts refer to the current market as being overheated, but beginning to cool down. What exactly does that mean?

What is an Overheated Market?

We refer to a market as being overheated when it is experiencing rapid, unsustainable growth. The Canadian real estate market is commonly referred to as being overheated because it has expanded at a frightening rate in recent years. Although we have begun to see this trend change as interest rates have been rising quickly since March.

In order to kickstart the economy following the onset of national lockdowns in March 2020, the Canadian federal government decreased interest rates to record lows in order to encourage consumer spending. The reduction of these rates, combined with a rapid decline in the supply of housing, led to a price boom unlike anything we had seen before. While home prices have been steadily rising for the past few decades, the COVID-19 housing boom was the last straw—propelling prices through the roof.

Although property prices exploded, the cost of rent increased at a much slower rate, increasing the gap between the cost of buying and renting a home. In an attempt to curb these concerning market conditions, the Canadian federal government has announced a number of newly proposed policy changes including the ban on foreign buyers and the optional removal of blind bidding.

The most promising initiative however, is a $1.2 billion construction project, aimed at building affordable housing units across Canada to help address part of our current supply concerns.

The Pros and Cons of an Overheated Market

Given the recent interest rate hikes and proposed federal policy changes, housing costs are projected to decrease slightly in the short-term, but not a significant long-term drop. This puts buyers in a uniquely complex position. We have seen this cycle repeat itself over the decades. Historically, housing has, for the most part, been an appreciating asset with temporary dips that would correct themselves within a year or two. This means that it was normal to expect the value of your home to increase over time. The same can be said in today’s market. We are seeing the beginning of a temporary dip that will not last and will start going back into an upward pricing pattern over the next little while.

Although a drop in prices would benefit new homebuyers, buying before the drop, historically speaking, most people who wait until the real estate market bottoms out to before buying a property tend to lose out in the long run because it’s nearly impossible to time the market correctly. What this also does it push many aspiring homebuyers towards renting which in turn causes the average rent to increase drastically.

Another concern is Canada’s short supply of housing. Regardless of interest rates, a lack of available properties will always inflate prices. The Federal government’s proposed “ban” on blind bidding is unlikely to help matters since it is not a ban at all and keeps the matter optional for sellers. The only real solution is to build more affordable housing units. In the meantime, however.

Although it may seem more advantageous for young Canadians to rent, the longer an aspiring home-buyer postpones the purchase of their first home, the more likely they are to end up having to buy at a more expensive price down the road since eventually home prices will continue to rise again. Especially as the market starts to go down, now is a fantastic time to buy. Given that property prices have increased far faster than rental rates, renting has become an increasingly favourable option in an overheated market, which we are beginning to see this change now.

Of course, there is no single solution for all Canadians. Market conditions vary from region to region. In many metropolitan centers such as Toronto or Vancouver, most new residents don’t even consider buying properties. These areas often have a high concentration of jobs, but extremely high housing prices, leaving many Canadians unable to address their needs for proximity causing an influx of purchases in suburban areas such as Brampton, Vaughan, Newmarket, London Ontario, Burlington, Oakville, Milton, and Mississauga.

Homeownership remains one of the best investments a Canadian can make, and now may be the best time to make that leap. Even if, and that’s a big if, the Canadian government follows through on their promise to build more affordable housing, it will take several years to get all of those new homes built and we will not see home prices stay low for too long.

Rent vs Buy: Canada’s Predictions for 2022

While owning a house may still be more affordable than renting in the long run, that recent unaffordability of housing can make it challenging for many homebuyers to get the home they want. gap is closing very quickly. This more recent unaffordability of housing can be attributed to the real-estate boom of the pandemic brought on by record-low interest rates and other factors. Following the recent increase in the lending overnight rate, and the subsequent mild drop in prices, we can still be quite sure that home prices will only fall temporarily and will continue to grow again in the near future.

It is my prediction that we will start to see most institutional lenders begin to offer the 40-year amortization again soon which will help keep mortgage payments affordable even at the new higher interest rates. This will also help homebuyers continue to qualify for higher mortgage amounts, and this will help existing homeowners be able to continue to refinance their mortgages and draw equity from their homes. All of this will contribute to the upcoming growth of home prices and market activity.

Some will choose to continue renting in hopes of being able to save up more for a down payment. The reality is that given the cost of living going up with inflation while the average household income remains stagnant, it is unlikely that by renting for another year or two or three, the average household will be able to save up enough additional funds for a down payment that will account for whatever increase in home prices will occur during that time.

Despite some of the challenging conditions currently present in the market, homeownership is not completely out of sight. Here are some steps you can take to increase your odds of success in the market:

  • Get your mortgage pre-approved. As a homebuyer, the more certainty and convenience you can create for the seller, the more likely you are to secure the home. By getting your mortgage pre-approved, your credit score, income, and financial standing are all cleared in advance, making it easier for the seller to proceed with your offer.
    It is important to keep in mind that most pre-approvals, and even approvals only hold the interest rate for up to 90 days. This means that if you successfully buy a property and the closing date is pas the 90-day mark from the time your pre-approval or mortgage commitment was issued, the lender will raise your rate should their rates go up before the closing date. This is why in certain circumstances, your mortgage broker shout update and resubmit you mortgage pre-approval or application to update the commitment and secure the best rate at the time if your closing is more than 90 days out.
  • Stand out in the bidding process. In order to stand out during the bidding process, some buyers may bid $200,000 over the asking price or offer to pay upfront in cash. Fortunately, there are other methods of sweetening the deal without breaking the bank. You can get pre-approved and make your offer firm without the need of a financing condition. You could also allow the seller to remain in the home for a few months after closing, or you could continue storing a few of their belongings in your garage if that’s important to them. It is best to approach these “perks” on a case-by-case basis, to help determine what best suits the needs of your seller.
    Although we are not seeing bidding wars as much since the rates began increasing, I expect them to return once rates stabilize and the markets starts to heat up again.
  • Optimize your search for listings. Statistically, most houses on listing sites get bought over the weekend. To ensure that the websites you are browsing show an updated catalogue of homes, you may want to check in mid-week, potentially on Tuesdays or Wednesdays. Furthermore, it is always wise to ask your agent about pocket listings. These are planned home sales that have not yet been listed on the market, and can be discovered through word-of-mouth between agents.
  • Work with professionals. Navigating an overheated market can be scary. Luckily, you don’t have to do it alone. Here at Clover Mortgage, our expert team of mortgage brokers can help set you up with the best home buying plan for your unique needs. Whether you are looking for the perfect lender, or hoping to get your mortgage pre-approved, Clover Mortgage can help. Contact us today to schedule a free consultation with one of our professional brokers.


Steven Tulman
Written By Steven Tulman
“Making the process of getting a mortgage an easy and enjoyable experience for every Clover Mortgage client!”