So the stock market has dropped by 10% this year. The interest rate on a GIC is 1-2%. But housing prices increased by 10% in September.
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.
For all of your real estate questions please call PropertySold.ca Inc. today at:
1-855-900-SOLD and speak to a customer service representative. We have licensed real estate professionals on staff ready to take your call right now. List your property for sale by owner today. New! We now accept real estate listings from real estate agents and new home builders & developers. More Information »
Real estate news in Canada including buy and sell information, local market updates, guides, tips for Canadians in the real estate market.