Housing prices in Canada are higher than they have ever been. Two reports released this week show just how hot the market is.
The Teranet-National Bank house price index shows an increase of 5.4% from a year earlier. The Teranet index is based on a composite of resale prices in 11 Canadian cities. The rise was driven, as could be expected, by prices in Vancouver and Toronto. Vancouver’s prices were up by 9.7% from last August to this August, while the cost to buy a house in Toronto went up by 8.7% since last August.
Adding to the heat in the market was Hamilton, which was up by 8.8%. The Hamilton market is being pushed by its proximity to Toronto. People who can’t afford the Toronto market are crossing the Burlington Skyway in search of more affordable real estate an hour away.
You have a better chance of finding more reasonable house prices in Halifax, Ottawa, Montreal, Winnipeg, and Quebec City where, according to the Teranet survey, prices were down this year. Overall, in the eight regions outside Vancouver and the Toronto-Hamilton area, prices were up a mere 0.2%.
A report by the Canadian Real Estate Association shows the same trend. The average price of a Canadian home sold in August hit $433,367, an increase of 8.7% in the past year. Not including Vancouver and Toronto, the average Canadian home was worth $338,755 in August, with a year-over-year gain of 4.2%.
With housing prices rising so dramatically over the past year, it begs the question: how can people afford to buy a house? Well, according to Statistics Canada, they are borrowing more. Total household debt in Canada amounted to $1.874-trillion at the end of June.
A report by CIBC World Markets shows that 80% of the Canadian credit accumulation was driven by mortgage borrowing. The increase in mortgage debt is due to the rising housing prices. If your house costs more, you are going to have to borrow more. This is especially true in Vancouver and Toronto.
The report also found that while household debt levels are going up, defaults on mortgages are coming down. Mortgage delinquencies are at 0.3% in Canada and Ontario defaults are at just 0.15%.
Of course there are risks. Interest rates are at historic lows. If interest rates do rise, or if there is a sudden employment crisis, Canadians might have a tougher time meeting their obligations. But for now, according to the ratio of debt service to disposable income, Canadians aren’t struggling to carry their loans. Meanwhile, as the Teranet and the Canadian Real Estate Association reports, the value of real estate has risen substantially over the year.
So how big a mortgage is it safe to carry? First, find out how much you can actually afford. Typically most lenders suggest that you spend about 28% of your monthly income on a mortgage. Also, be sure to shop around and compare mortgage rates.
Another measure is to compare the cost of owning to the cost of renting. Interest rates might be low, but there are other costs. When you own, you have to pay taxes, fees, insurance, and all the household maintenance expenditures. I can tell you from experience that a new roof doesn’t come cheap. Our roof was solid, but because it had been a while since it was done, the insurance company wouldn’t cover our house unless we did the job.
I’m an optimist. It’s good to be cautious and to consider the possibility of rising interest rates and a slowing economy. But I tend to believe that things are going to get better and, as you mature, you’ll get a better job or a raise. You also have to remember that you are generally not buying bricks and mortar. You’re buying a home where you can live comfortably and raise a family.
Owning a house is also a way to build wealth. Even if the market fluctuates, history has shown that over a long stretch, a house is a good investment. If you can ride out the bumps, it might even be your best investment. When her husband retired in 2008, my sister sold her house and bought a condo. Her friends encouraged her to rent. She didn’t need the cash to maintain her lifestyle. Now, she told me, the value of her condo has appreciated by 50%.
For most people, a house is the biggest purchase they’ll make in their lives. They will probably be paying the mortgage for years or even decades. It’s a challenge. Spending too much on a house can leave you with little money for the other goals in life, such as college funds, retirement, or even vacations. So set your priorities.
Flickr: Philip Taylor