BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

When interest rates are super low and property values are super high, don’t they wash each other out? After all, affordability stays about the same in this scenario that actually describes current conditions.

Carrying costs for a property depend on interest rates and also the purchase price of a property; but also on money down; property taxes and heat.

Carrying costs of a home, that’s what we’re referring to. Since some have said that low mortgage interest rates may lead to higher property values, one could also state the reverse: high property values have lead to lower mortgage interest rates. The logic of these statements is obvious, depending on your point of view. Given that one is “at the very least” related to the other, one could argue for ever which came first: the chicken or the egg.

No matter how you slice it, many buyers aren’t benefiting from the super low interest rates since the property values are fairly high. Things would’ve been different for them if interest rates had come down yet property values hadn’t gone up. You can blame it mostly on market forces that things are the way they are. Some would (also) blame the government.

Measuring a precise “reverse link” between interest rates and home prices may be hard but what does simple logic have to say about this? If money is dirt cheap, it’s really tempting for many people to buy more and borrow more. This, in itself, doesn’t make houses more expensive. After all, if a buyer wants a more expensive property (and assuming they would qualify for that) then they’ll purchase that more expensive property. This, doesn’t make the cheaper property more expensive. However, there is a slow and indirect push-up effect that occurs. The effect of JUST lower interest rates is therefore impossible to be singled out.

Obviously, when incomes go up, people can afford to purchase more expensive houses. This is true, unless interest rates and/or property values go up similarly.

LINKS AND REVERSE LINKS

Home affordability will depend on a variety of factors: income, asset base, credit worthiness but also on mortgage rates and naturally the price of real estate. If one of these five points shits, then the whole picture may be off. Usually, more than one point will shift. For instance: income and credit worthiness often go hand-in-hand (but not always). Often, when incomes rise, so will the price of real estate. There are many other links that may be more or less logical.

Many bankers have been saying for at least a year that mortgage rates are “about to go up significantly”. Yet, right now rates are about as low as they’ve ever been. In fact, the Bank of Canada’s rate hike campaign (if and when it comes) may dominate all other factors determining affordability as well. In the meanwhile, we’re seeing upward pressure on real estate prices, fuelled (at least in part) by these low interest rates. Even earlier this year, many bankers and economists predicted that we’d see higher rates starting this year. Obviously, that hasn’t happened just yet. Their forecasts have now shifted to late 2012 or early 2013. It is only logical to expect that the postponement of interest rate increases might extend the upward momentum in home prices in the coming quarters.

Most people need little stimulation to purchase real estate. Apparently, most of us are born with a strong desire to own real property.

STIMULATION TO PURCHASE

This temporary reprieve from rate hikes could reduce pressures on home ownership costs in the short term. Some analysts suggest, however, that “some negative force on affordability” may surface down the road. This, due to possible home price increases resulting from rate-driven demand. This is a polite way of saying that whatever goes up must come down – to a point.

Still, the housing affordability gauge shows that household budgets are spending a relatively normal percentage on home ownership costs. Historically speaking, this percentage is so average because the interest costs are extremely low, right now. If these low interest rates were to change (upwards), then the percentage of home ownership costs will also start to climb.

The affordability readings measure the percentage of gross income needed to pay mortgage payments, utilities and property taxes on “typical” homes across Canada. One might argue that the affordability should be improving at present, due to the low interests rates. Although this appears to be somewhat the case, analysts caution that a significant increase in interest rates will quickly swing the affordability reading the other way, which will have a dampening effect on home prices.

You make mortgage payments smaller if you spread them out over a longer period. Current mortgage rules have brought the maximum period down to 25 years for most.

FOOLING THE SYSTEM

Only a few years ago, we had 40-year amortizations and 100 percent financing options. Right now, most mortgage amortizations are capped at 25 years while 100% financing is just totally unavailable. These measures have “cooled” the market while making mortgage payments on a similar purchase more expensive, thus reducing affordability. Still, the market is showing great stability.

A cautious conclusion might be that our continued low-rate milieu keeps on fuelling the market, while the economy isn’t really doing all that great. Imagining that the economy will be improving over time, we’ll also see higher personal earnings. This may offset increased borrowing costs, making for a continued level of stability in home affordability. With so many factors at play simultaneously, there’s no way to predict the future. If we could, we’d be very rich!

If you enjoy reading about real estate and little mortgage issues and problems, then the blog article links below may be of interest to you.

MORE to read on real estate markets in general and financing:

Info about real estate in blog format: http://www.mennorealty.ca/Blog.php/blog-format

A moving sale: http://www.mennorealty.ca/Blog.php/selling-out

Who needs a real estate lawsuit? http://www.menno.ca/?p=19049

Most recent local market stats: http://www.mennorealty.ca/Blog.php/november-2012

Web special about jargon: http://www.menno.ca/?p=19065

Interest rates and home sales: http://www.mennorealty.ca/Blog.php/easy-way