After a period of steep year-over-year sales declines, the number of homes changing hands is back on a steady course. “Last year’s deep downturn in Canadian home sales appears to be fading” according to Sal Guatieri, Bank of Montreal economist.
The tighter mortgage rules clearly had an impact on the number of transactions, knocking out many potential first time buyers, but it didn’t impact home prices like the Department of Finance had hoped. Concerns that we’re in a housing bubble persist, yet after five years of crying wolf the pundits are softening their tone. Since 2011 TD Bank has maintained that housing is 10% overvalued, but has recently changed that estimate to about 8%. CIBC economist, Benjamin Tal doesn’t see a collapse coming, “I do not see smoke. I see a boring slow process over five to seven years that will take fundamentals and prices back in line.”
The truth is that housing prices are strongly (inversely) related to mortgage rates. Economic conditions set mortgage rates and mortgage rates set affordability. People will pay what their budgets allow. 40 years ago 5 year fixed interest rates hit 21.75%; today we’re at 2.89%. A $105,000 mortgage used to require a $1,830 monthly payment. For the same monthly payment you can now borrow almost $400,000, and both scenarios assume a 25 year amortization. As long as this era of ultra-low mortgage rates persist, so will high home prices.