Can Greater Vancouver housing market go higher?
Market sustained by low interest rates
Longer amortization and low interest rates have a huge impact on home prices. With the introduction of mortgages with 35-year (from 25 years) amortization, home buyers are able to afford homes 16% higher in value. Coupled with interest rates drop from 5% range to around 3.55% for 3-year fixed rate now, home owners can afford homes 40% higher in values as compared to 10 years ago.
The above price chart for detached homes at $910,000 range shows a huge price gap between current average house value and home pricing trend line around $540,000. The above chart showed that average Greater Vancouver home price as of November/09 is 69% higher than the base-line price!
Danger of higher interest rates on home prices
If the mortgage rates are raised from current fixed 3-yr term around 3.55% to 5% or higher, home buyers will be constrained to buy homes at only around 80% of today's price. A loss of market confidence will trigger a collapse in home prices. Current rental return is generating negative cash-flow if an investor is buying a home for investment.
Rental returns as compared to home prices
From 2001 to end 2009, rental increase was in the range around 25% to 30%. On the other hand, home prices more than doubled and gained almost 135% in value. A big jump in interest rates from current 3.0% level to higher rates of 5% to 6%, will have a major impact on many home owners.
When renting is an option, home buyers may want to wait and see how the economy and interest rates play out in the next year or two.
Homes currently listed for sale in Vancouver and Richmond can be viewed here.
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