The REBGV benchmark house price reached $800,796 in February. The rise in listings puts us into a ‘balanced’ market condition according to the Real Estate board. Will we be able to maintain this ‘balance’? I suppose it depends on how much our market is driven by CMHC support and how new rules and higher interest rates affect those margins. Here’s some interesting math courtesy of reader bestplaceonmeth:
Based on $58,000 median household income in Vancouver using ING’s “how much can I borrow?” for 35 years (yes, 35 years – it’s what all the cool kids are doing nowadays). Also assuming no other debts (ha ha) and a conservative $250 a month for property taxes or condo fees or both.
Prior to April 19, qualifying at 1.95% variable rate:
YOU QUALIFY FOR A MORTGAGE OF $415,270 WITH 5% DOWN!
After April 19, now having to qualify at 3.89% fixed rate:
YOU QUALIFY FOR A MORTGAGE OF $313,880 WITH 5% DOWN!
Holy foreclosure, Batman! That’s a 25% haircut off current prices!
Now let’s fast forward to the end of 2010, 4 successive 1/2 point interest rate hikes and you now need to qualify at a rate of 5.89%.
YOU QUALIFY FOR A MORTGAGE OF $244,287 WITH 5% DOWN!
That’s 41% less than 10 months ago, and we’re just getting started.
See, I told you math was fun.
Now, who wants to go out and get into a bidding war?
UPDATE: It’s been pointed out that CMHC currently requires the 3 year rate to be used, so the difference is not as extreme as the above example. DoDo1975 clarifies with this math:
A quick calculation shows that a family with absolutely zero debt making $90k a year could borrow $533,721.32 over 35 years today. All else being equal, after April that number will be $456,311.49 or approximately 14.5% less. This 14.5% is constant across all income levels.
If interest rates on the 5 year prevailing rate also go up 1.5% in the future, this translates into a 28% decrease in the amount someone can borrow compared to today.