It’s
difficult to scan the latest news without coming across one headline or another
that talks about Canada’s housing market being on the verge of collapse or its
bubble bursting.
But the
true market experts beg to differ. That’s why it’s important to look at the
facts.
According
to BMO Capital Markets, an examination of valuations and affordability across
the country – not just in Toronto and Vancouver – suggests less risk of a
nationwide hard landing than implied by many headlines.
In fact,
aside from detached properties in Vancouver, Toronto and Victoria, the other
major cities BMO Capital Markets studies appear affordable for median
homebuyers.
In other
words, mortgage payments and other housing-related costs do not exceed 39% of
family income (that’s the guideline established by the government in July 2012
for obtaining an insured mortgage).
In
addition, with the exception of Vancouver’s condos, Canada’s major cities would
remain affordable even if mortgage rates rose two percentage points to more
normal levels.
Nationwide,
mortgage payments on the average-priced house consume a moderate 28% of
household income, or 23% for people living outside Vancouver and Toronto, says
BMO. Keep in mind that national mortgage-service cost ratio peaked at 44% in
1989 and 36% in 2007.
Most
important, the current 28% matches the long-term norm, suggesting that rising
income and falling mortgage rates have largely offset the deterioration in
affordability caused by higher home prices.
To pump
life into the economy, the Bank of Canada (BoC) has kept Canada’s overnight
rate at just 1% since September 2010. According to BMO, a normalized overnight
rate would be closer to 3.5% given the inflation target of about 2%.
RBC
Economics also notes that, while home prices are currently elevated,
exceptionally low interest rates keep the ownership cost burden manageable for
the most part.
While
affordability levels generally do not appear to pose a threat to the Canadian housing
market at the moment, RBC cautions things could be radically different if
interest rates were to move rapidly and significantly higher, explaining that
exceptionally low mortgage rates have been the main factor preventing
affordability from reaching dangerous levels in recent years.
Thankfully,
RBC sees continued lower interest rates, expecting the BoC to leave its
overnight rate unchanged at 1% throughout 2013 and raise it only gradually
starting in 2014.
The CD Howe Institute’s monetary policy council is
recommending the BoC keep the target at 1% until March 2014.
RBC
believes the eventual rise in rates will take place at a time when the Canadian
economy is on a stronger footing, thereby generating solid household income
gains, which, in turn, provide some offset to any negative effects from rising
rates.
If
interest rates remain low, income continues to rise and home prices stabilize
in 2013 – as BMO anticipates – fears of a deep housing correction should
recede.
With
mortgage rates remaining at all-time lows, now’s a great time to get a new
mortgage and/or take measures to accelerate your mortgage payments while rates
are still low. There are many ways to pay your mortgage off quicker such as
increasing the frequency of your payments from monthly to weekly or every other
week, or making extra or lump sum payments.
