Toronto and Vancouver Home Prices Soar Due to Falling Mortgage Rates

Canada’s two largest real estate markets, Toronto and Vancouver, experienced a surge in home prices in April. Both cities saw home prices rise by 2.4%, with the benchmark price in Toronto reaching $1,145,700 and in Vancouver reaching $1,170,700. Although tighter inventory and rising sales may have contributed to the increase, it is more likely that falling mortgage rates, which introduced leverage similar in size to the price increases, were the primary cause.

Toronto and Vancouver Home Prices

Despite the gains seen in April, both cities’ home prices remain lower than the previous year. However, with the current pace of monthly increases, the losses can be neutralized fairly quickly. The gain is unusually large and surprising since both cities have been experiencing a lack of inventory, and it is unlikely to produce similar growth rates.

Mortgage Rates and Leverage

The reintroduction of easy credit in Canada has contributed to the sharp increase in home prices. Borrowers are shifting towards fixed-rate mortgages, and fixed rates have fallen by an average of 0.3 points between March and April, providing an increase of roughly 2.6% in leverage for borrowers with the same income. The monthly payments, however, remain the same, despite the sharp increase in home prices. The savings from the lower interest rates are absorbed by home prices.

Demand and Debt Servicing

The demand for homes increases prices, but those prices are limited by the amount of debt that can be serviced. Once mortgage rates began to fall, home prices rose in line with Canada’s record population growth. This phenomenon is in line with the findings of the Bank of Canada (BoC). Lower rates didn’t improve affordability; instead, home prices adjusted to absorb the discount.

In conclusion, the surge in Toronto and Vancouver home prices in April is a result of falling mortgage rates and the reintroduction of easy credit. The gain is surprisingly large, and although tighter inventory and rising sales may have contributed, it is unlikely to have produced similar growth rates in both cities. The savings from the lower interest cost are absorbed by home prices, and the demand for homes increases prices, which are limited by the amount of debt that can be serviced.

Source: https://betterdwelling.com/toronto-and-vancouver-real-estate-prices-jump-similar-to-mortgage-credit/