Low mortgage rates keep Toronto real estate market alive
Before even getting to the article, let me say a few things. When mortgage rates were 20%, house prices were $120,000. Now they are 3.48% and house prices are $444,000. Prices rise and fall based on affordability. Yes, low mortgage rates have had a hand in allowing prices to rise to where they are now, but rates and prices are always balancing out.
Mortgage payments on $120,000 at 20% are almost $1,900 a month. Current prices of $444,000 at 3.48% are around $2,150. Not adjusting for inflation or changes in income, we can see that the payments are pretty close to each other. But people make $65,000 a year these days, not $25,000.
So mortgage payments are actually a smaller percentage of wages than they were when prices where 1/4 of what they are now. Let’s put everything in perspective before we start getting all excited.
Tony Wong – Toronto Star
A significant drop in long-term mortgage rates has given the Greater Toronto Area housing market a timely boost, even as figures show that sales are slowing markedly.
But even super low rates may not be enough to kick-start the market heading into the fall, say analysts.
Uncertainty over the economy means the Bank of Canada on Tuesday is widely expected to take a pause on its key overnight lending rate after three straight rate increases.
“The rates for fixed mortgages are just about the lowest I’ve seen in the last ten years,” says Jim Wong, a mortgage broker at the Royal Bank of Canada.
“We love these rates, it will likely encourage people to buy,” says Lois Volk, a mortgage broker with Invis.
Long term rates seem to be an especially good deal, with some lenders offering five-year fixed mortgages for under 3.5%.
Variable rates can be had as low as 2.3%. Low inflation, a high loonie and a slowing economy means the bank has less reasons to hike rates.
That’s good news for the Toronto housing market as it continues to feel a chill on sales.
Sales were down by 17% in the first half of October to 3,012 sales, compared with 3,631 sales in 2009, according to figures released by the Toronto Real Estate Board on Monday.
Comment: Slow down on the whole “market chill” thing. Let’s look at the past few months and see how sales have declined – or have they?
Jul – down 34%
Aug – down 22%
Sep – down 23%
Oct – down 17% (as of mid-month)
So the decline has slowed, markedly. We are now at half of the slowdown we saw in July. Thus, sales volume is actually increasing, not slowing down. Sure, there are fewer sales than last year, but we all know that the last half of 2009 was crazy. But we are closer to October 2009 sales than July was to July 2009. And sales are still up 3% as compared to the middle of October 2009.
Let’s make sure to put all of the numbers in their proper perspective and not just pick and choose to try to make a point. I have no agenda, I just want to be sure that the data is reported accurately.
Thanks to robust sales in the first half of the year, year to date sales are still up by 3% compared with 2009.
“The GTA resale market is balancing out from the record level of sales experienced in the second half of 2009 and the first few months of 2010,” said TREB president Bill Johnston. “This is why sales figures have been lower than 2009 levels in recent months.”
The average price for October transactions during the first two weeks was $444,644, up 7% compared with the average of $414,479 recorded in 2009.
“We are seeing enough buyers relative to sellers to promote continued price growth year over year,” said Jason Mercer, TREB’s senior manager of market analysis.
Lower interest rates means that there are more qualified buyers in the market, which has been a mitigating factor for prices falling more rapidly.
But mortgage broker Wong says buyers aren’t coming out of the woodwork solely because of rates.
“For people already in the market this is a perfect time, but clients aren’t buying solely because rates are low,” said Wong. “They are still saying the rates are great, but they are also worried that prices could drop further in the future.”
Wong says most buyers still go for variable rates because of the still greater than 1% gap between short term and long term rates.
However, for buyers who have put less than 20% down and may be more uncertain of their finances, he recommends locking into the five year rate to provide a level of certainty.
Volk says some of her clients have already switched from variable to long term rates.
“They’ve done well with variable rates over the last while, but figure it can’t go down much lower,” says Volk.
The Bank of Canada was the first among the group of seven industrialized nations to raise its benchmark rate earlier this year, steadily increasing it to the current 1%.
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