The blue line in the
diagram shows Vancouver's historical house prices between January 1992 and February 2012 and the respective
mortgage rate at that time. Based on these data the historical
average annual mortgage cost is $32,376 (i.e. the annual amount of interest to
be paid to carry the mortgage). The red line shows, for a given mortgage rate, which house price will result in this average mortgage cost.
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House prices (thousand
Canadian $) are MLS average resale prices
and have been adjusted for inflation to February 2012. Mortgage rates are the average 5 year residential mortgage lending rates.
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The diagram shows that since 1992 there
have been times when buyers paid more than the average mortgage cost
(blue line above red line) and times when buyers paid less than the
average mortgage cost (blue line below red line). E.g. in both January
1992 and February 2012 mortgage costs were quite well aligned with
the historical average.
A possible reason why
buyers are willing to pay more than the average mortgage cost is
their expectation of decreasing interest rates (or increasing house
prices). The expectation would be to be able to finance part of the
cost through the gain in price. In an environment of decreasing
interest rates the inverse may hold true, i.e. buyers will pay less
than the average mortgage cost due to their anticipation of losses.
Data Sources: 1) House Prices, Bank of Canada publication, Chart 16 and CMHC Housing Now March 2012, Table 5. Both based on data from The Canadian Real Estate Association. 3) Inflation data, Statistics Canada, Table 326-0020. 4) Mortgage interest, Statistics Canada, Series V122497.