For anyone who got carried away and purchased a house by mortgaging it to the max, at an unbelievably low floating interest rate, it's like the hangover after the party.
The Bank of Canada delivered the sobering reality check last week that interest rates are bound to climb in the next couple of years.
These last few months in Vancouver, the market has picked up so much there has been bidding wars over bungalows. One house on the city's east side sold for $320,000 above asking, symptomatic of the sudden activity that has erupted. An estimated one-third of recent purchasers are people who've been long shut out of the market and are eager to snap up houses at recessionary prices and interest rates as low as 3.69 per cent for a five-year fixed rate.
In a Royal Bank of Canada report released in November, senior economist Robert Hogue observed of the Vancouver market: “the turnaround has been nothing short of breathtaking.”
There were 3,083 sales through the Multiple Listing Service in November in Vancouver, compared to only 874 sales that same month in 2008. The benchmark price rose more than 12 per cent in the same time frame.
It isn't a bubble, says Helmut Pastrick, chief economist for Central 1 Credit Union, the umbrella organization for credit unions in B.C. and Ontario. Mr. Pastrick has also analyzed the B.C. housing market for the Canada Mortgage and Housing Corporation.
“It's a market pick-up, a resurgence. Market activity is up in response to low rates and the attractiveness of home ownership,” says Mr. Pastrick.
“This run-up is going to lose steam for a variety of possible reasons, but for the year as a whole, I think that [sales] volumes will be higher in ‘10 than ‘09 and prices will be higher in ‘10 than ‘09, too.”
Interest rates are also certain to climb, which is part of a return to a healthy, normal economy.
“That ‘normal' might not appear for two or three or four years,” says Mr. Pastrick. “But before we reach that normal, interest rates will be rising.”
Historically, the relationship between interest rates and housing sales and prices has been a complicated one. But generally, when interest rates go up, house prices go down and when interest rates go down, house prices go up. Statistics that compare house prices to interest rates demonstrate this negative relationship in a rudimentary way. More importantly, numbers of housing sales are also affected by interest rates. In 2007 there were record sales in B.C. and not coincidentally, an extremely low interest rate, according to data supplied by Landcor Data Corp.
“Probably the single most important variable that affects sales is interest rates,” says Mr. Pastrick.
“Like many markets, it tends to be the result of a complex set of factors, and putting it down to one over-simplifies it,” he says. “But certainly, if you have to choose one, interest rates are the single most important variable given that, for most people, financing is a big part of the equation.”
For the consumer, an up-tick in interest rates of just a few points can be the difference between being a homeowner and a renter. For example, a typical east side Vancouver bungalow that is purchased for $800,000 with $600,000 in financing and a five-year fixed rate with a 35-year amortization currently requires a household income of $82,500, according to information supplied by mortgage broker Rob Regan-Pollock's Invis Team. If the rate goes up just three percentage points, the borrower would be required by the lender to earn $112,500 a year. And those amounts only apply to someone with a platinum credit rating.
