A better way to gauge housing affordability
Some people are predicting a crash in the Canadian housing market because price-to-income and price-to-rent ratios have gone up a lot. But these ratios omit mortgage rates, a key determinant of prices.
Predictions about an impending housing market crash in Canada have been in the news for months, but many believe that the measures used to gauge housing affordability are an inaccurate way to make these claims. This article from the Globe and Mail details a different way to measure housing affordability, rather than a simple price-to-income calculation.
The housing affordability index measures at national, provincial and city levels, and takes into account mortgage rates, median income, property taxes and utilities for various house types and market prices. As mortgage rates are one of the key factors used to determine house prices, leaving them out of the calculation is an unrealistic way to measure affordability. A common complaint about the classic calculation method is that it takes into account only a 5% down payment. This may be true of many first-time buyers, but a large portion of the population are relocating, and using existing equity as their down payment.
The article also comments on mortgage rates, which are predicted to rise in 2013. A common assumption is that an increase in mortgage rates will impede affordability. This belief fails to take into account the fact that when mortgage rates do eventually rise, it will not be an isolated event. Historically, rates have tended to rise when the economy is cycling up, meaning that income and employment will be rising as well, thus offsetting the increase. To discuss how these factors affect you, contact an Ottawa Mortgage Broker.