The Toronto real estate board just reported that the amount of sold homes increased by 25% in September and the average price increased by 10%. Wow!

This is great news for average Canadians. Average Canadians have most of their net worth in their home.

When housing prices increase by 10%, it means that average Canadians become more wealthy (at least on paper).

The average home price in Toronto has increased from $395,000 in 2009 to $431,000 in 2010, and it’s currently at $464,000 so far in 2011. The reasons for these house price increases include low mortgage rates, and high demand: new listings growth has not surpassed the amount of sold home growth, resulting in a seller’s market.

The increase in the average home price is making Canadian real estate owners and investors feel richer because homes in Canada are highly leveraged. For example if a home owner put 10% down in 2009 on a $400,000 home, it would mean that they invested $40,000 in the home and would have taken out a $360,000 mortgage. That home is now worth $470,000. This means that the homeowner has turned their $40,000 into $120,000 in 2 years (The home is worth $470,000 and the mortgage is now $350,000). That is $40,000 a year in appreciation. The home owner has tripled their money in 2 years. Of course the home owners would not see this money unless they sold (or refinanced their home).

The healthy real estate market is great for home owners, banks, and the economy. Home owners feel richer, banks receive their interest on mortgages, and the economy benefits from consumer confidence. Everything is fine for everyone, as long as home prices don’t decline.

Of course the rise in home prices means that anyone entering the market (without selling a home), will need to pay the higher price and will need to take on a larger mortgage. For example, like we mentioned above, a person buying a $400,000 home with 10% down in 2009 had a $360,000 mortgage. The same person buying a $464,000 home with 10% down in 2011 would have a $418,000 mortgage. The person buying a home in 2011 has a mortgage that is $58,000 larger. This additional $58,000 will actually cost more than $128,000 over a 30 year amortization at a 4% interest rate ($58K + $70K in interest). This is a significant difference. Does the person buying in 2011 know that they will be paying a lot more for their home than the person who bought in 2009?

Even looking at a $418,000 mortgage. Do buyers know how much money they make a year and how low it will take them to pay back that amount? Even if you can pay $20,000 a year in principal (not even including interest costs), it would take more than 20 years to pay for that home. Including interest payments, the buyer would need to pay $20,000 a year for 40 years. 40 years!

The increase in home prices is not being driven by increases in salaries. It’s not like Canadians are getting raises of $35,000 a year. Still home prices in Toronto are increasing by $35,000 a year. How long can this continue? Will home prices by 10% more expensive next year. Will buyers in Toronto be putting 10% down on an average home of $500,000 in 2012? Will the average mortgage increase from $418,000 to $450,000? I predict they will. I predict that as long as home prices keep increasing, home buyers will be willing to pay more for homes.

PropertySold.ca

Rates:

1yr 2.89%
2yr 2.99%
3yr 2.69%
4yr 2.89%
5yr 3.19%
6yr 4.29%
7yr 4.49%
3yr variable closed (Prime – .70%) = 2.30%
5yr variable closed (Prime – .60%) = 2.40%

Even with the uncertainty built into rate forecasts it still bears paying attention to what the experts say our future rates will look like, after all they are trained in their field, have access to information that the average consumer may never see and they get paid well to know their job and advise their employers so future financial strategies can be implemented.

Below you will find the latest year end summaries by each of the major Canadian Banks.

The Bank of Canada’s overnight rate helps set the lenders variable mortgage rates.

Year-end Avg 2.00 2.75
Chg vs Today +1.00 +1.75
(All figures are rounded to the nearest .25 point increment.)

Latest 5-Year Government Bond Yield Forecast Government bond yields drive 5-year fixed mortgage rates.

Year-end Avg 3.32 3.78
Chg vs Today +0.53 +0.99

There are a few things to take into account for the short term. Canada’s economy expanded 0.5% in January, we also saw a strong start to our GDP numbers which grew matching that of Decembers. The Conference Board of Canada projected an overall economic growth of 2.4% this year indicating further that the rebound appears on solid ground. Normally these and other factors would indicate a certain and early interest rate hike by the Bank of Canada, but Governor Mark Carney is not expected to even signal a hike in his benchmark rate when the central bank next meets given the optics of doing so during an election campaign.

Still, the overnight rate will inevitably rise later this year from its current level of 1 per cent, possibly in July. TD senior economist Pascal
Gauthier sums up the common sentiment amongst the experts on the future of rates; “We remain of the view that July is the most opportune time for the next hike…Once engaged, the hiking cycle will likely persist at a gradual pace of a quarter-point at each meeting for the remainder of the year, bringing it to 2 per cent by year-end. Looking out further, unless a sizable downside risk materializes between now and then, the overnight rate will likely reach 3 per cent by year-end 2012.”

Where will the balloon actually land?….Somewhere over there

Please see the attached links to the source information for the above article.

- TD raises mortgage rates

- What is the bond market telling us?

- Strong economy sets stage for summer interest rate hike

- Brokers: TD rate hike signals industry shift

- Rate U-Turn

- Canadian Interest Rate Forecast

The views expressed above are the opinion of the Author and should not be considered professional financial advice.

For More Information About Mortgages and Rates Please Call Abrahim Niyazi @ 1-866-RATE-708

Rates:
1yr 2.44% (-0.10%)
2yr 2.95% (0.00%)
3yr 3.44% (-0.06%)
4yr 3.79% (-0.10%)
5yr 3.89% (0.00%)
3yr variable closed (Prime – .75%) = 2.00%
5yr variable closed (Prime – .65%) = 2.10%