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Home Prices Off the Rails

April 24, 2021
5 mins
Canadian money spread out around a graph and a calculator

Have you ever seen national home prices run up so far so fast?

Neither has anyone else.

This logarithmic chart below shows percentage changes in average Canadian home prices over time. The last 12 months have been unlike anything in modern records. The closest such price eruption was 1989, after which home values needed a decade-long breather.

Avg Canadian Home Prices.png

Valuations clearly have regulators worried. The Bank of Canada, for example, has been warning of “extrapolative” expectations. In other words, a record number of people seem to think recent price gains are an indicator that prices will keep inflating at an unsustainable pace.

How reliable are public expectations? After huge price moves, the answer is not very.

Research finds that “year-ahead home price expectations are revised in a way consistent with short-term momentum in home price growth.” And short-term momentum eventually ends. In fact, as we saw last May and in 2017, it can end fast.

Home price expectations.png

Source: Bloomberg

As we write this, there are early signs that price pressures in some markets (e.g., the GTA) could start abating in the coming months, as this chart from HouseSigma suggests.

Market Temperature.png

Source: HouseSigma (partial month data)

And let's not forget the record 335,000 housing starts in March and 0.5%-point increase in fixed mortgage rates. Both are slightly bearish for home prices, other things equal.

Today's Featured RatesUpdated 16:02 ET on Feb 27, 2024

Rates are based on a $300,000 mortgage.

card image
6.99%
Term
5 Yr Fixed
Loan to value
Up to 80%
Insurance
Uninsured
Rate held until
May 31
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1.73%
Term
5 Yr Fixed
Loan to value
Up to 65%
Insurance
Insurable
Rate held until
Apr 16
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4.72%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
May 21

The Time for Leverage May Not Be Now

What does any of this have to do with mortgages?

One worry is young people buying too much house with too little equity. Average new mortgage amounts are surging. If you’re seeking financing with only a 5% down payment, particularly if your debt ratios are above-average, tread carefully. A high-ratio purchase today risks years of being underwater on a mortgage if home prices revert to their mean—as they always do—sooner than expected.

Price weakness could effectively trap you in your home if you didn’t have other financial resources to pay off the mortgage and transaction costs.

By no means is that a crash prediction, however. For all we know, prices could surge another 20% from here. After all, housing inventories are still too low, fiscal stimulus is out of control and we are in the expansionary part of the business cycle. That’s generally a recipe for strong employment and home appreciation.

But when you buy with 99% financing on day one (including default insurance fees), it doesn’t take much correction to leave you holding negative equity. A minor 10% price dip three years from now, even after years of making principal payments on your mortgage, could keep you from selling and covering all costs if you didn’t have other liquidity.

5%-down mortgages are made for people who know they’ll be in a much stronger financial position in a few years. If your future earning potential isn’t bright enough to wear shades, you probably should steer clear of low-equity mortgages…unless you don’t mind being bound to your home long-term.

Rob McLister

Rob McLister has been informing mortgage consumers and professionals since 2007. In that time, he’s written more than 2,500 mortgage stories for publications ranging from the Globe and Mail — where he presently serves as mortgage columnist — to the National Post, Maclean’s, Canadian Mortgage Trends and RateSpy.com. Regularly quoted throughout the media, Rob is a committed advocate of greater transparency in the mortgage industry. He’s also been a vocal consumer advocate for more sensible mortgage regulation. In 2011, he launched two mortgage fintechs: mortgage comparison website RateSpy.com and digital mortgage broker intelliMortgage Inc. The former is the go-to source of Canadian mortgage news and the only site comparing all publicly advertised prime mortgage rates. The latter is Canada's leading online mortgage provider for self-directed borrowers. Both companies were acquired in 2019 by RATESDOTCA Group Ltd.

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