In a recent international survey, Vancouver was singled out as one of the most expensive real estate markets in Canada and in the global market in general, bringing up concerns about the potentially egregious effects of increasing mortgage interest rates on the market’s consumers.
In a statement, Capital Economics’ David Madani said that even a “moderate increase” in mortgage interest rates could have a surprisingly powerful impact against home affordability. The economist said this in light of how home price values are typically directly proportional to household incomes.
According to Capital Economics’ Demographia International Housing Affordability Survey, Hong Kong was the only market cited as being more expensive than Vancouver’s. A total of 378 metropolitan markets in North America, Australia, the United Kingdom, Japan, China, Ireland, Singapore, and New Zealand were covered by the analytic report.
The survey is relatively simple, comparing median home prices with median incomes, with the theory that a market is less affordable if higher home prices are disproportionate to lower incomes. Capital Economics’ Madani believes that cities such as Vancouver and Toronto may be hit deleteriously should a mortgage rate spike take place. As home prices in those markets are much higher than the median consumer’s income, this could mean a lot of borrowers will find themselves having difficulty making their mortgage payments on time.
In specific, Vancouver’s median home price was listed at $704,800, or 10.6 times higher than last year’s median household income of $66,400. This marks the greatest bifurcation between median home pricing and household income in the 11-year history of the analytic survey, and a slight increase from calendar 2013, when median prices were 10.3 times higher than consumer incomes. And in Toronto, the median home price was $482,900, or 6.5 times higher than last year’s median household income of $73,900.
Talking about the Canadian market in a broader sense, Vancouver was the only Canadian city ranked among Capital Economics’ top ten most expensive housing markets. Aside from Toronto, British Columbia markets Victoria, Kelowna, and Fraser Valley were also graded as unaffordable on Capital Economics’ Demographia analytics. Conversely, Moncton, New Brunswick was the most affordable market in Canada on the survey, while Fredericton and Saint John, N.B., Windsor, Ont., and Charlottetown were also described as being affordable markets.
However, the general Canadian market was described as “seriously unaffordable,” as home prices were showing at 4.3 times higher than median incomes in leading urban markets, and 3.9 times higher than Canada’s overall median household income.
For 2015, Madani believes that Canadian mortgage interest rate changes may be predicated on potential changes in the United States market. “We can expect the U.S. Federal Reserve to soon begin to raise interest rates, and with that we expect to see rising U.S. Treasury yields,” he posited. “On that basis, we have been expecting long-term interest rates in Canada to go up, and those rates are what really, in some sense, determine or influence mortgage rates.
Separate from Capital Economics, another related report from TD Economics said earlier in the week that an interest rate hike of about two percent could redound to tougher financial situations for consumers in the Greater Toronto Area. From about 16 percent on a previous report, TD Economics forecasts that 20 percent of consumers would have to pay 30 percent of their monthly income to make their mortgage payments; a lower percentage is better for this particular metric.