The housing market is showing surprising resilience during this period of relatively high mortgage rates.
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Although sales volume is down 20% in the first seven months of the year compared to the same period from January to July 2022, sales prices remain surprisingly solid despite the very sharp rise in mortgage rates.
I remind you that in early 2022 it was possible to negotiate a 5-year mortgage at an interest rate that could vary between 2.4 and 2.7%.
After the Bank of Canada interest rate hiked from 0.5% to 5%, the interest rate on 5-year mortgages is now between 5.4% and 6.7%. It has more than doubled in just under 18 months.
OH SURPRISE!
Although it’s vastly more expensive to mortgage a property these days, it hasn’t caused the sale price of Quebec real estate to drop significantly.
In terms of prices, the resale housing market has remained almost indifferent or insensitive to the surge in mortgage rates that seems to flow down a duck’s back like water.
THE HOUSE FILLS IN 6%
Across the provincial market, single-family homes sold for an average price of $421,000 in July, down 6.5% from the all-time high of $450,000 in April 2022, according to APCIQ data for the month of July.
The condo sold for an average price of $360,000, down 6.2% from the record price ($384,000) 15 months ago.
Mortgages up 31%
Let’s take a closer look at the effects of the sharp rise in mortgage interest rates on financing a property purchase. To do this, I compare the cost of financing the acquisition of the above typical properties today with the cost in April 2022, during the historic peak of the housing market. The calculations are based on a 5-year mortgage with an amortization period of 25 years. I’m not considering a down payment to compare apples to apples.
For the purpose of the exercise, I will use the April 2022 mortgage rate of 2.7% and the average mortgage rate of 6.0% for the month of July 2023.
At its peak price of $450,000 in April 2022, the monthly payment for a typical single-family home was $2,061. Today, a typical single-family home, whose median price has dropped to $421,000, requires a payment of $2,694 per month. Despite a 6.5% drop in the median price, the same typical Quebec home now costs nearly 31% more to finance.
For the standard condo, we see essentially the same percentage differences. At $384,000, the April 2022 mortgage payment was $1,759. Although the median price has fallen to $360,000 today (-6.2%), the mortgage is up 31% to $2,303 per month.
Compared to early 2022, the monthly payment per $100,000 5-year mortgage has increased by $182 from $458 to $640.
THE RIDDLE
We’re talking about a spectacular increase in mortgage payments of almost 40% in about 18 months. And whether average typical house prices are down just 6% from the April 2022 record prices, meanwhile, remains unclear.
Is it because many buyers were homeowners themselves and sold at a high price?
Young households may be wondering whether home ownership is now or never, and that prices will continue to rise in the long run? Or is it the less affluent parents who help them financially?
Newcomers and many Quebec households may believe that Quebec real estate prices remain relatively low compared to real estate prices in other major Canadian provinces and cities. And that, as a result, despite exploding mortgage financing costs, they see significant potential for capital gains.
Why aren’t prices going down? The answer lies in all of these assumptions!
