Real estate highs still showing
Another Record Set; Longer mortgage terms fuelling cost, industry warns
Garry Marr, Financial Post
Real estate prices hit another record high last month in the country’s top 25 markets, a move some commentators say reflects the growing dependency of Canadians on debt to finance purchases.
Real estate author Don Campbell says the latest statistics from the Canadian Real Estate Association are further proof that the newest trend in lending — long-term amortizations that have increased to 35 and 40 years from 25 years — is fuelling price increases.
“I would say one-third of the percentage point price increase is due to [longer amortizations],” Mr. Campbell said.
“Real estate is driven by monthly payments and you can afford more and pay less monthly when your amortization is moved from 25 years to 40 years.”
The Ottawa-based Canadian Real Estate Association said yesterday the average price of a home sold in the country’s largest cities rose to $325,881 last month, an 11.2% increase from a year ago.
With 10% down and a 7.19% interest rate on a five-year mortgage, a consumer with an average Canadian home would make monthly payments of $2,088.80 based on a 25-year amortization. Based on a 40-year amortization, the consumer would make monthly payments of $1,840.67.
The consumer with the longer amortization would pay interest costs of $589,786, compared with interest costs of $333,189 for the mortgage amortized over 25 years.
“I think this is having more of an effect on the low end of the market than the top end,” said Mr. Campbell, who thinks people are paying more for homes because with the new mortgage products they can afford more. “Instead of 11% price increases, they might be 6% to 8% without [longer amortization].”
A report from the Royal Bank of Canada this week suggested as much as 50% of new insured mortgages — those with less than 20% down payment — are going for amortizations of more than 25 years. The bank suggested as much as 25% of refinancings are for the longer amortizations.
Benjamin Tal, a senior economist with CIBC World Markets, said it’s probably too early to suggest the longer amortizations are fuelling an inflationary market for real estate. “It’s not a big enough piece of the market yet to matter,” he said. “Potentially, it could be big. Look at how much overall housing there is and this is not enough to influence markets yet.”
Elton Ash, regional executive vice-president of Re/Max for Western Canada, said the new products are helping consumers to buy. “It certainly has helped with the affordability, especially in markets like Vancouver and Victoria,” he said. “But I don’t believe the escalation in prices is because of the mortgage products. It is because of strong economic performance, strong consumer confidence and interest rates still being favourable.”
Bob Linney, a spokesman for the Canadian Real Estate Association, said there is no data to indicate new mortgage products are responsible for some of the rising prices in the markets. “I don’t have the stats to back that up,” he said.
It is starting to look like a surge in new listings could put some downward pressure on prices. Nationally, new listings were up 3.4% from a year ago.
Red-hot markets such as Saskatoon, where prices are up 56.4% from a year ago, saw listings surge by 65.9% from August, 2006. In Edmonton, prices are up 27.7% from a year ago, while listings are up 57.8%.
“I’m relieved to see the listing inventories coming up. It’s better for the consumer,” said Mr. Ash.
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