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Tag Archives: variable mortgage

What housing bears may be overlooking

Larry MacDonald – Canadian Business

[dropcap]I[/dropcap]t was nearly a year ago when Professor George Athanassakos wrote a Globe and Mail article warning that housing was a bubble about to pop, and he has just penned another piece with the same message. I agree with him that there is over-valuation—but I also believe there are other factors to consider.

Of note is the monetary cycle. The U.S. housing market didn’t implode when the Federal Reserve was trying to generate economic growth. Nor did it implode when interest rates started edging up (because income and job growth were picking up and supporting the housing market). It only keeled over when the Fed was deliberately trying to slow down the economy and had jacked up its rates until they surpassed long-term rates (inversion in the yield curve).

That was the catalyst for an end to the U.S. housing mania—a major tightening in monetary policy. I don’t see it in Canada yet; in fact, it seems to me that the Bank of Canada is still at the stage (as is the Fed) where it wants to generate growth instead of slow it down.

Another consideration is the choice of valuation yardsticks. How about looking at the measure most ordinary folk go by, which is affordability—i.e. monthly mortgage payments in relation to their income. The over-valuation doesn’t look so severe on this basis because a big component of mortgage payments, interest rates, is very low. As one readers of Athanassakos’s article said in the comments section:

“In 1990 I bought a house for $100,000 and my mortgage was about 12%, so the monthly cost to me was approx. $1,030. I recently bought a cottage and the price was $250,000. I have a 2.5% variable mortgage. My payments are approx. $1,100 per month. So the price is 250% more and the payments are the same except that 22 years ago when I bought my first house $1,030 was a STAGGERINGLY painful burden.”

Comment: And that $1,030 in 1990 would be worth about $1,621 in today’s dollars due to inflation. So a cottage that cost 2.5x as much on the sticker price actually cost less per month. That is what I keep saying, people buy real estate based on the cost per month, not the sticker price. So comparing the sticker price to anything is a flawed statistic.

One could argue that rents are too high, they rose 31% between 1996 and 2005, while incomes only rose 26%. According to the City of Toronto, average rents for 2 bedroom apartments were $800 in 1995, with a one bedroom around $650. Average rent today, in a condo, for all sizes, is $1,686 according to Urbanation. Thus, rents have gone from around $725 on average to $1,686 in 17 years. That is a 232.6% increase, almost 14% per year! Compare that with real estate prices, which have risen a bit less than 6% per year during the same period.

So anyone who says that price to rent ratios are out of whack are not using the right info. Or they are spinning it, the same way I just did. And I always go back to my $200,000 mortgage in 1981 for 18% that would have cost around $2,000 a month – which is $4,900 in today’s dollars. A $600,000 mortgage today at 3.09% would be around $2,100 per month.

In the end, it is the dollars each month that we have to pay that matters.

Lastly, there are regional differences in the housing market. As another commenter wrote on the same story:

“[The] housing bubble in Canada is a tale of two cities, and the rest of the country. Yes, by most measures Toronto and Vancouver prices are too high, especially for condos. But I live in Calgary. We have not seen a huge increase in prices (since 2006-7) and prices are actually down a little in the last year. There are similar situations in Sask., Manitoba and the eastern half of B.C. I have family in Quebec and house prices there are far from inflated too.”

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.

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