Home ownership through time

Do you have the same reaction I do regarding the rising cost of property? Do you wonder how people can afford to buy homes given the steadily increasing market prices since the early 2000s? For the past several years, I’ve been telling myself that this situation cannot last and that a market correction is imminent. In the current context, however, it seems to me that this situation may go on for some time yet.

Recently, I found an interesting stat in The Wall Street Journal that may in part explain what enables buyers to purchase homes at current price levels. The article stated that the 30-year mortgage rate had fallen to a historic low of 2.98%. Currently, mortgage brokers in Canada offer a 5-year rate of 1.84% and a 10-year rate of 2.44%.

While the information I found referred to the U.S. market, it also reflects the situation in Canada. Falling rates, over the course of several years, have allowed many homeowners to reduce their borrowing costs to levels that may be widely underestimated.

In the past 30 years, house prices have soared both in the U.S. and Canada. However, you have to look beyond pricing to gain a fuller understanding of real-estate affordability.

If you compare the 1990 median sale price of a house in the U.S. to the current figure, you find there’s been a 190% increase; however, monthly mortgage payments during this same period have risen only about 40%.

Since the beginning of the century, the median sale price has gone up 90%, while monthly mortgage payments have increased by only 8%. During the same period, inflation jumped up more than 50%.

Now, if you make the same comparisons since 2005, you find that sale price has increased by 26% and monthly payments has actually dropped by 9%.

Even if house prices have substantially gone up, the resulting increase in monthly costs has been much lower. The advantage for homeowners of fixed-rate mortgages is that monthly payments remain the same while their annual revenue generally increases over time. As a result, the cost of owning a home becomes more and more affordable as their career progresses.

Given the increase in real-estate prices, I quickly realized that people buy homes more often on the basis of monthly payments than total house price.

Of course, owning a home entails much more cost than just monthly mortgage payments. However, from a strictly financial standpoint, with such low interest rates, homeowners are only too happy to renew their mortgage. The resulting savings can enable them to put more money aside for retirement!

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor with PEAK Securities Inc., and was obtained from sources we deem to be reliable; however, we cannot guarantee that such information is complete. The author may not be held accountable for any financial decision a reader may make based on this content. The opinions expressed herein do not necessarily reflect the views of PEAK Securities Inc. PEAK Securities Inc. is a member of the Canadian Investor Protection Fund.