I’m looking to buy a condo in Ottawa.  I haven’t purchased one yet, so this is an “as it happens” series of posts.

As a practicing geek, computer scientist, business person, and anal retentive, I have a process:

1. Learn as much as I can real estate, real estate history, 
2. Talk to people who have been through the process before
3. Model the decision making process in Excel
4. Rank candidates as objectively as possible

This post is about the fun facts I’ve learned:

Real Estate Language Is A Trap

Ask a broker, agent, condo company or anyone else in the industry if you should buy and their answer is always “yes”.  Most of my initial conversations have went something like this:

Me:  ”I’m thinking it’s time to finally buy a place, but I’m just looking at the moment.”

Rep:  ”That’s a brilliant idea.  You must be an astronaut you’re so smart.  It’s a great way to build equity and wealth.  Have you selected a property yet?”

Me:  ”No, I’m just developing an understanding of the market.”

Rep:  ”Well you should definitely buy a property.  This is a beautiful investment property and our amenities are superb.  We’re also offering a cash-back incentive so you can start building your equity right away.”

On the surface, the words “equity”, “property”, “amenities”, and “investment” give most people the feeling that they’ve already started down the path to financial world domination.  In most situations, that couldn’t be further from the truth.

Interest Rates: What Goes…Down Must Come…Up?

Interest rates are historically low.  They’re also artificially low.  The global economy went down the crapper in 2007 when US banks played hot potato with subprime mortgages (mortgages that for all intents and purposes should have never been awarded to people who simply couldn’t afford them).  Today the cost of borrowing is next to nothing.

Source: tradingeconomics.com

Interest rates will rise again.  When they do, people who took on too much “leverage” will find their “investment” is really a “liability”.  My advice would be to take today’s interest rate, increase it by a few points, and use that in your affordability calculations.

A Real Estate Price Correction

Canada’s monetary policy aims to keep inflation at a target rate of 2%. But, the average MLS sale price has increased an average of 7.4% each year for the last 10 years.

There are various attempts at explaining this, including:

1. Salaries increasing faster than inflation
2. Real Estate “investing” as a fad
3. Baby boomers moving to higher value homes in the city centre

Whatever the reason, simple economic theory dictates that real estate cannot continue to outpace cost-of-living salary increases in perpetuity.  Assuming that your property will continue to appreciate forever is a fallacy.  It has to be, or no one on earth will be able to afford it in the future.

Ottawa Is An Anomaly

Ottawa presents an interesting dynamic in the real estate market:

1. Our unemployment is lower than the national average by a full percent
2. Our salaries are higher than average
3. We have a high concentration of aging baby boomers moving into the city’s core, driving prices up

Look out for future posts “Calculating Affordability: Rent vs Buy” and “The Best Condo According To Math”.