Jun 172014

The Canadian housing¬†market continues to defy gravity! ūüôā According to CREA the average home price in May increased to $416,584, a 7.1% jump from a year ago. The number of homes sold also increased by 5.9% month over month, which is the largest gain in several years.

A lot of people feel concerned that this kind of growth is unsustainable. They question how prices can increase so much without personal incomes growing at the same pace. Many have concluded that we are surely headed for a correction soon.

I hope I can explain what’s going on, and why it would be perfectly normal for home prices to move¬†even higher.

As an investor I know from experience that personal income has very little to do with purchasing power or¬†prices. For example I spent over $200,000 on¬†stuff in 2013 (mostly financial assets) even though my take home income last year was less than $50,000. Living in a debt based economy means we have the privilege to borrow money from other people so we may buy things even if we don’t have the cash ūüôā

Local incomes also don’t account for the massive amounts of¬†foreign money¬†that gets¬†pumped into the Canadian housing¬†market each year. But what really affects the price of homes is the cost of financing. Over the last year mortgage rates went down in this country. A 5 year fixed rate term is under 3% now. ¬†Cheaper financing options means people can buy more expensive homes.

Mortgage and down payment real estate market canada

If the Bank of Canada lowers¬†its Key rate by 1%, bond yields would¬†fall to almost nothing, and mortgage rates would be even lower than today. You could probably get a $300,000 mortgage for 2%, which would cost a new home buyer just $6,000 a year in interest to live there. That’s cheaper than renting a comparable property! On the other hand if the Key rate increases¬†by 1%, mortgage rates will also climb, and many people wouldn’t be able to afford a $300,000 home anymore so home prices would drop across the board. If rates don’t move at all, home prices should¬†simply¬†increase at roughly¬†the pace of economic growth, which is about 2% a year.

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Jun 242012

Starting on July 9th, the maximum amortization period for a new mortgage will be 25 years, down from 30 (only if it’s insured by CMHC.)¬† This is a measure introduced by our finance minister to cool the housing market. This works because if someone wanted to buy a home today with a $300,000 mortgage, they can pay it off at $1512 a month in 30 years. But once the amortization rules change to 25 years, they have to make larger payments, ($1660 a month) in order to pay off the debt in a shorter period of time. Not a big difference, but it might be enough to make some people think twice about buying that home. For potential buyers who could afford a $300,000 mortgage today, might have to settle with something cheaper starting next month. I predict real estate prices will drop a little bit from July to September this year.

This is welcomed news for many in the economy. A lot of workers are really relieved because instead of raising interest rates to combat housing prices like the government usually does, this move does not hurt anyone working in the export or manufacturing sector. Landlords will also like these new changes. Since it will be more difficult to finance a home, people who are currently renting but are saving to buy their own place will need to save even more money for a downpayment before buying the home they want. This is also great news for home buyers who were planning to finance their mortgage for 25 years or less anyway. It will lower the prices of homes without affecting their original plan at all ^_^;. Some people think if you can’t pay off a mortgage in 25 years then you probably shouldn’t buy it in the first place (I don’t agree with that saying though.)

I’m not a big fan of this change myself. ¬†It limits my choices so I can’t choose between 25 or 30 years anymore. But I understand why they thought these new rules will be good for the economy. I personally don’t think we’re in a real estate bubble and prices are going to crash. But I know a lot of people will disagree with me when they see¬†houses like the one below¬†selling for over $2.5 million :).

edit post: As B-Plus kindly mentioned below, if your mortgage is not insured by CMHC then these new rules don’t apply to you. For more info about your personal situation please ask your lender, bank, broker, etc :).


Random Useless Fact:¬†According to¬†names.whitepages.com¬†there are dozens of people in the United States (as of February 2011) with the first name “LOL“. ¬†(„āú‚ąÄ„āú)