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Friday, May 24th, 2024

Canadians’ mortgage debt ramping up fast as cheap money fuels leap in luxury home prices

houseA new report from the Canadian Imperial Bank of Commerce says prices for the country’s most expensive high end homes are rising much faster than the overall market, skewing average values.

Canada’s housing bubble: As Alberta’s market tumbles, the rest of us wonder who’s next

Some of the more bearish economists think Alberta’s malaise may spread to other parts of the country, but there are some things the rest of Canada can learn from Alberta’s troubles. Read on The report from deputy chief economist Benjamin Tal was released Wednesday and shows the top 10 per cent of detached homes in Vancouver, in terms of price, have risen between 200 per cent and 250 per cent in value over the last decade. The bottom 10 per cent of detached homes, by price, have only risen about 50 per cent during the same period.

“There are two markets and they are not even talking to each other,” said Mr. Tal, in an interview, referring to the differences between the high end of Vancouver’s housing market and the low end.

He also waded into the controversial issue of foreign ownership by saying the most expensive end of Vancouver’s detached home market is likely being driven by overseas buyers. “They’re not just buying condos. I think this is where you are seeing the foreign investor.”

The issue of foreign ownership has even caught the eye of Prime Minister Stephen Harper during the election campaign. He vowed last month do something if “foreign ownership non-resident buyers” are found to be driving up the cost of housing.

There are two markets and they are not even talking to each other Tal noted that Toronto market has slightly different characteristics than Vancouver because price gains start to decline among the 10 per cent most expensive homes in the city. By comparison, the bottom 10 per cent of homes in Toronto have actually outpaced a similar subset in Vancouver with about a 75 per cent increase in price over the last decade.

“The average price in Vancouver is almost meaningless,” said Tal, adding affordability might not be as stretched on the lower segments of market as imagined based on the mean price of homes.

Canada Mortgage and Housing Corp. recently took the same stance on Vancouver’s homes, during a conference call in August to discuss the risk in the city’s market. CMHC’s chief economist Bob Dugan noted “ in the first quarter of 2015 the top 20 per cent of houses in Vancouver sold for an average of $2.2 million, while the other 80 per cent had an average price of $550,000.

Related Low interest rates trump cheap oil in Canadian housing market as prices forecasted to keep rising Canadian seniors racking up debt to fund bigger homes, glitzy lifestyles Toronto detached homes climb back over $1 million as prices keep rising in seller’s market Tal says the risk in the market is not so much default and notes in his report that mortgage arrears were just 0.3 per cent of all outstanding mortgages in June.

“The issue is that if you have 25 per cent or 30 per cent down payments, those people will not walk away from their assets,” said Tal, referring to what might happen to those consumers if interest rates start to rise. “But you might have reduced economic activity. If you are stretched, you spend less. That’s the risk (to the economy), those people don’t spend on anything else.”

But he leaves no doubt that mortgage debt is rising fast and reached $1.2 trillion outstanding in the second quarter of 2015. Five years earlier it was only $923 billion. But the low interest rate environment that has seen variable rate mortgages drop below 2 per cent has consumers actually paying less interest.

Tal’s own calculations are that interest payments were only $78 billion in the second quarter of 2015, a third consecutive quarter that payments have declined.

“That’s why it’s an interest rate insensitivity story,” said Tal, adding it’s not something that is affecting all Canadians. “The home ownership rate is no longer rising but those who take debt are taking more debt because of the increase in house prices.”


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