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Squirrelers recently wrote about the paradox of low interest rates and falling housing prices in the U.S. He notes that due to the fallout from the crash and the stumbling economy, mortgage rates are among the lowest they’ve been for a long time, while house prices are also falling.
Canada, however, is a different story. Here, mortgage rates are also very low, but housing prices are still quite strong. Average prices have risen from $142, 038 in 1990 to $339,042 in 2010. That is a nominal return of 4.45%, and after adjusting for the CPI, that is a real return of ~2% per year.
Now, Canada’s economy has improved substantially since the early ’90s, but Canada also has a lot of land. Mortgage rates, on the other hand, have declined from double-digit figures to historic lows today. One can get a variable-rate mortgage for 3% or a 5-year fixed for 3.49%. This is much more affordable than the double-digit rates of yesteryear. The danger is that if rates go back, heavily-indebted Canadians could feel a lot of pain.
What are your thoughts on the Canadian housing market? How long will the party continue for?
Source: http://www.cmhc-schl.gc.ca/en/corp/about/cahoob/data/upload/Table1_EN_Canada_w.xls
How about the unsold house inventory? in many areas in the US, builders went nuts putting up developments, fueled by cheap money. Areas like the SF Bay Area though, where the supply is very limited due to open space laws and build restrictions, have much higher square foot costs than the national average.
Does not seem out of bounds, yet. “The stock of unabsorbed new housing units was relatively stable over the past year, indicating consistent strength in demand for newly constructed homes” < -- From the report here: http://www.cmhc-schl.gc.ca/odpub/esub/63830/63830_2012_M02.pdf?fr=1332358240718
What’s worrying is all the house zombies that will be created if housing suddenly gets a lot more expensive in terms of rates.
I’m no expert on the Canadian market (being from Chicago), but a few people I know in Ontario have talked about how prices have really gone up quite a bit in recent years. And, how people are planning to keep making money on increasing home prices.
Just sounds a lot like the US did in the days of runaway prices, even if the background macroeconomic factors have differences.
The ratio of housing prices to household income is out of whack. The only way it can be sustained is if people’s purchasing power increases enough to afford the new prices. I don’t know if we’ll see a crash, but that ratio can’t keep going up.