Monthly Mortgage Update: December 2014

What’s causing increases in house prices? Well, our parents are partly to blame, of course, but so are underlying economics. In this month’s update, I’m investigating if house prices – especially those in Canada’s largest metropolitan cities – are supported by, well, reasonable explanation. Read on for the results of my findings!

Report Reveals Mortgage Choice shift and Increase in Parental Support for Down Payments

Earlier this month, we wrote a blog post covering the major mortgage stats to come out of the Canadian Association of Accredited Mortgage Professionals’ (CAAMP) Annual State of the Residential Mortgage Market in Canada report (wow, that’s a mouthful!). Every year, CAAMP releases updated data on the mortgage market, as well as some new statistics. Among the more interesting tidbits: it seems more homeowners are choosing variable rate mortgages. In fact, 20% of new homeowners opted for variable rates over fixed rates in 2014, up 11% from the 9% we saw in 2013. The decision to go variable may have contributed to the significant drop in the average mortgage rate on all home purchases, from 3.23% in 2013 to 2.89% in 2014.

Personally, I thought the most interesting information in the report was on down payments. I don’t recall detailed down payment information being included in previous reports. (It’s also possible, however, I’m just more interested this year because I recently bought my first home.) CAAMP found the average down payment made on a first home has remained unchanged over the last 35 years – it sits at 21%. However, the number of first-time homebuyers who relied on a gifted down payment from their parents increased from 2010 to 2014, as home prices rose steeply in urban areas. According to the report, 11% of first-time homebuyers were gifted their down payment from family, and 6% were given a loan; this is up sharply from the 6% of buyers whose family members gifted them money in 2000 to 2004 (the amount given as a loan stayed constant).

So, if families are forking over down payment funds to their kids, how is this impacting the housing market? The report states, “even at this relatively elevated share, we cannot say that this source of funds has become an important driver of the market.” But it’s hard to believe the increase in parental support is not contributing to higher home prices in some capacity…

House Prices May Be Supported by Underlying Economics

Last month, I spoke at length about the Vancouver housing market, which continues to confound us spectators, with its unrelenting rise. Well, this month, a slew of reports were released claiming underlying economics are supporting Canadian house prices, including those in Toronto and Vancouver.

Immigration to Canada and net migration to BC (a.k.a. Canadian residents moving to BC from other provinces) are supporting Vancouver’s housing market, more than widely believed. Supporting arguments are made here, here, here and here.

On the other hand, the Canada Mortgage and Housing Corporation (CMHC) is probing why Canadian housing prices have been higher than U.S. prices in real terms since 2006. Average Canadian home prices at the end of 2013 were about $400,000 on a cost-adjusted basis, compared with about $250,000 in the U.S, according to CBC News. And RBC just released its third quarter housing affordability report, which doesn’t paint such a rosy picture for Vancouver.

The housing affordability measures, which capture the proportion of pre-tax household income needed to service the costs of owning a home at market values, rose for all housing types in the third quarter of 2014 (an increase in the measure represents deterioration in affordability). RBC’s measures for Vancouver increased by 1.6 percentage points to 83.6% for bungalows and 0.4 percentage points to 85.6% for two-storey homes. Put simply, it would take around 85% of your pre-tax household income to pay for a detached home in Vancouver.

It’s hard to imagine these kinds of housing prices explained away by immigration and other underlying economics! I fear we are left without conclusive answers yet again this month.

Ratehub.ca News

Team Case Study

Earlier this month, we finished up the series of Q&As on our blog re: my recent home buying experience. After explaining the bidding war process (and our tactics) and then moving into our home, I shared some lessons learned after my first month of homeownership. Check it out for some in-depth tales from the trenches.

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‘Til next month!

–KL