Canada’s two largest real estate markets saw home prices rocket higher last month. Toronto and Vancouver real estate prices climbed in April, rising at the same rate. Both markets are seeing sales rise and tighter inventory, but it’s unlikely to have produced the same growth rate in both cities. Falling mortgage rates that introduced leverage similar in size to the price increases, is more likely the culprit.
Toronto Real Estate Prices Climbed 2.4% Last Month
Greater Toronto real estate prices remain lower than last year, but jumped last month. A typical, or composite benchmark, home rose 2.4% (+$27,200) to $1,145,700 in April. It follows a slightly higher 2.5% gain in the previous month, and was the third consecutive monthly increase. Home prices remain significantly lower than last year, but at this pace, the losses can be neutralized fairly fast.
It’s an unusually large gain, and the word unusual gains emphasis once you peak at Canada’s other large and pricey market.
Vancouver Real Estate Prices Climbed 2.4% Last Month
Greater Vancouver home prices are also climbing sharply, after prices bottomed in January. The benchmark climbed 2.4% ($27,400) to $1,170,700 in April, the third consecutive increase. Prices remain lower than last year, but three months at this rate would practically reverse those losses.
Experts from both regions wasted no time this morning explaining it was a lack of inventory. Both cities must have experienced the exact same lack of inventory to produce similar levels of price growth.
Mortgage Rates Fell Providing A Similar Level of Leverage
More likely Canada’s reintroduction of easy credit has something to do with it. While the Bank of Canada (BoC) has held rates, borrowers have shifted towards fixed rate mortgages. Fixed rate mortgages fell an average of 0.3 points between March and April, providing an increase of roughly 2.6% leverage for a borrower making the same income.
It’s also worth noting that monthly payments are the same. Despite the sharp increase, a benchmark home in March with a conventional mortgage is roughly the same in April. Any “savings” from the lower interest cost was absorbed by home prices. That was true for both Toronto and Vancouver’s numbers.
Demand increases prices but those prices are limited by the amount of debt that can be serviced. Squeezing on a tube of toothpaste applies pressure, but it doesn’t do much with the cap on. Once the cap is off, it now has room to move into and absorb. Same principal with mortgage credit, which is why prices fell despite Canada’s record population growth. It wasn’t until mortgage rates began to fall that all of a sudden prices are now rising in line with that expansion.
Shocking, right? It shouldn’t be, it’s in line with findings from the Bank of Canada (BoC). The former Deputy Governor once explained that lower rates didn’t improve affordability, but home prices simply adjusted to absorb the discount.
Either that or your local think tank is right, and buyers analyzed economic trends, immigration flows, liquidity, and then coincidentally concluded prices should absorb the payment discount from lower rates. Probably not, but it could be anything, right?
Small loan with higher interest = you can pay it off faster, and not pay all of the interest.
Large loan with low interest= no escape.
Few.
You are correct, because this is not complicated. Prices are driven largely by how much the buyer can afford to pay each month. Everything else is secondary.
I dont know how anyone can argue that interest rates arent the #1 factor controlling house prices in Canada.
Its #1 interest rates (low rates pull investors into the market, increases demand) #2 immigration (directly increases demand), #3 belief that the BofC of government will rescue mortgage holders that get in trouble (increases investors, increases demand)
The supply side is a factor, but there are plenty of houses. If you were to remove just 50% of the investors house prices would tumble massively and people would say we have too many homes
Agreed. But how do we encourage Governments to disincentivize real estate as an investment or divert investments to grow our economy?
What’s very disappointing is the current Fed government who continues to push immigration as well as the demand for housing through first time buyer incentives. What is the end game? Why do they not see what the moral hazard they have created?
When we bought are first home the internet rate was 12. 3/4 percent. I remember when I was about 16 years old the rates where up over 20 percent . Half the people on street just dropped there house keys off at the bank . My family was lucky we locked in at 5.5 percent .