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Canadian’s “mortgage borrowing power” increased 126.1 percent between 2000 and 2016 due to higher wages and lower interest rates, contributing to rising home prices

New research from the Fraser Institute (as of August 2017) indicates that the average Canadian family has increased “mortgage borrowing power” by 126.1 percent due to increasing wages and lower interest rates.

The average “mortgage borrowing power” in the four main metro areas rose (from 2000-2016):

  • In Toronto area: to $338,161 (up from $221,214 in 2000)
  • In Vancouver area to $280,893 (up from $183,751 in 2000)
  • In Calgary area to $352,671 (up from $221,214 in 2000)
  • In Montreal area to $262,459 (up from $171,692)

 

Family incomes increases, combined with lower interest rates, contributed to substantial increases in “mortgage borrowing power” from 2000 to 2016. Data: Fraser Research.

 

“Mortgage borrowing power” is defined as the “maximum eligible mortgage size” — reported as average numbers.

Combination of 53 percent increase in income and lower interest

Overall family income, averaged across Canada, increased by 53 percent between 2000 and 2014. Together with a drop in interest rates from 7 percent in 2000 to 2.7 percent average in 2016, these create reasonable market forces and are the key to why prices have been increasing, according to some analysts.

 

Mortgage borrowing power in major metro areas due to lower interest rates and increasing family incomes. Data: Fraser Institute.
Mortgage borrowing power in major metro areas due to lower interest rates and increasing family incomes. Data: Fraser Institute.

 

With increased buying power comes increased demand, driving prices upwards. The report concludes:

“Like most goods, housing prices reflect the complex interaction of supply and demand and are driven by the innumerable motivations of buyers and sellers… The increased capacity to borrow means that larger mortgages become available to home buyers, which has an important impact on housing markets.”

In other words, the Ontario Government’s Fair Housing initiatives, by largely targeting foreign investment, may have missed the key driving forces in the market — normal market forces that normally adjust without interventions. The report states: “Without any increase in income or repayment requirements, potential home buyers can afford to borrow more money, enabling them to bid up the price of an underlying asset—in this case, housing.” 

Subsequent to the new rules, foreign investment represented only 4.7 percent of sales. [See our earlier feature on “Foreign buyers of real estate at 4.7 percent of sales: largely unchanged since last year.”>>]

Foreign buyers of real estate at 4.7 per cent of sales: largely unchanged since last year

The report summary summarizes: “Rising average family income coupled with decreasing interest rates resulted in a pronounced increase in the ability of potential home buyers to borrow. Specifically, the increase in nominal mortgage borrowing power for Canada as a whole was 126.1 percent.”

By metropolitan area, the increases in mortgage borrowing power, according to the researchers were:

  • Toronto increased 99.7 percent
  • Vancouver increased 118.4 percent
  • Calgary increased the most at 161.2 percent
  • Montreal increased 115.0 percent.

Average family incomes

During the researched period, Fraser Research looked at family income increases from 2000 to 2014, the last date available.  Overall income increased 53 percent when averaged in this period across Canada, while for the four main metro areas studied:

  • Toronto family incomes increased 35.7 percent
  • Vancouver family incomes increased by 47.8 percent
  • Calgary family incomes increased by 76.8 percent
  • Montreal family incomes increased by 45.5 percent.

Interest rate resulted in 52.9 percent increase

The declines in interest rates, from 7.0 percent in 2000 to 2.7 percent as of 2016 resulted in a 52.9 percent increase in “mortgage buying power” in Canada as a whole.

Fraser Research explained their numbers: “To estimate how interest rates influence mortgage borrowing power, we used a standard mortgage qualification calculation at the prevailing market interest rates… for a standard fixed-rate mortgage. The analysis uses the average Canadian family income in 2000 of $50,785. This calculation estimates the maximum amount of lending available to a family earning the national average income in 2000 at different interest rates ”

 

Estimated mortgage borrowing power in major metro markets from 2000 to 2014, charted by Fraser Research.
Estimated mortgage borrowing power in major metro markets from 2000 to 2014, charted by Fraser Research.

 

The dynamics of “mortgage power”

No other factors are as likely to impact demand, particularly as we head towards the more active Fall 2017 markets.

Fraser Research concludes that Canadians (and policy makers) should more closely consider these factors when trying to explain rising housing prices:

“Housing prices reflect the interaction of supply and demand, and the significant increase in mortgage borrowing power attributable to lower interest rates plays a role in this interaction. As such, the extent to which increased mortgage borrowing power influences home prices deserves closer consideration by Canadians and their policy makers.”

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