Home prices increased dramatically last month in Canada’s two most populous real estate regions. In April, home values in both Toronto and Vancouver increased. There has been a gain in sales and a decrease in inventory in both markets, but this probably hasn’t led to the same level of expansion in both locations. More likely to blame are falling mortgage rates, which introduced leverage proportional to the price rises
The Value of a Toronto Home Increased by 2.4% in the Past Month
Although they are still down from a year ago, Greater Toronto real estate prices increased last month. In April, the median price of a home, or the composite benchmark, increased by 2.4%, or $27,200, to $1,145,700. This is the third consecutive monthly increase, and it follows a gain of 2.5% the month before. Even though home prices are still down dramatically from last year, they are recovering quickly. It’s a huge increase, and once you consider Canada’s other major and expensive market, the word “unusual” takes on further significance.
The Value of a Home in Vancouver Increased by 2.4% Previous Month
After hitting rock bottom in January, property prices in the Greater Vancouver are also rising rapidly. The index rose for the third month in April, increasing by 2.4% ($27,400) to $1,170,700. While prices are still lower than this time last year, at the current rate the difference will be made up in less than three months. Today’s experts from both locations didn’t waste any time blaming a lack of stock for the problem. Similar price increases indicate that supply shortages were a factor in both cities.
Lower mortgage rates have provided a similarly powerful source of leverage
Probably more The easing of credit standards in Canada may be to blame. Borrowers have moved toward fixed rate mortgages as the Bank of Canada (BoC) has kept rates steady. The average fixed mortgage rate dropped by 0.3 percentage points from March to April, increasing the borrower’s leverage by about 2.6% assuming the borrower maintains the same income.
It’s also important to remember that the monthly installments won’t change. The standard property purchased in March using a conventional mortgage is essentially the same in April, despite a significant rise. Home prices ate up any “savings” from the reduced interest rate. Both Toronto and Vancouver saw similar results.
Price increases in response to rising demand are capped by what can be afforded in terms of servicing existing debt. When the cap is on, squeezing a tube of toothpaste doesn’t accomplish much. It can spread out and take up more space after the top is removed. For the same reason, despite Canada’s record population growth, home prices have fallen due to a lack of mortgage credit. It wasn’t until mortgage rates started going down that prices started going up in tandem with the economy’s growth.
Isn’t that shocking? It shouldn’t be, according to Bank of Canada (BoC) studies. Lower interest rates, according to the former Deputy Governor, did not increase affordability because housing values simply adjusted to absorb the decrease.
Either that, or your local think tank is correct, and buyers evaluated economic trends, immigrant patterns, and liquidity before concluding that prices should absorb the payment discount from lower rates.