The largest component of most family’s net worth is the value of their home. During the past decade values have increased faster than the rate of inflation. Better still, gains in the value of your principal residence are tax free. Upon retirement many downsize and count on the profit from sale of their home to help them enjoy retirement.
Gains have been spiked by ultra-low mortgage rates, a spin-off benefit of the global recession of 2008-09. Central banks have driven rates down well below normal levels in an attempt to promote spending and economic recovery.
With the recovery underway, spotty as it is for Europe and several Canadian provinces Including Manitoba, signs point towards rates beginning to climb in 2015. With current inflation in the range of 2-3%, the normal expectation for five-year mortgages is 5-6%. Today, you can get a rate below 3%. What happens to house prices when rates rise?
Lenders limit their mortgages based on ability to repay. With higher interest rates the ability to repay declines, along with the size of loan offered. As mortgages get smaller pressure is then put on house prices, which fall. The hope is that rates will rise slowly and any price declines will be modest.
That said, it is best to also consider “other factors,” Here I comment on only a few of them. First, the general picture. The prestigious Economist magazine estimates that Canadian house prices are generally over-valued by 32%. Only Belgium, Australia and Austria were noted as having houses more over-valued than Canada’s.
Then, consider information recently released by the Winnipeg Realtors Association. It reported that sales had fallen to 1,137 while listings topped 5,100 at the end of August. The WRA President said “buyers are taking “¦ more time” and that the situation was good for buyers. Nationally, listings fell and in the hot markets sales to listings increased. Here, listings grew and the ratio of sales to listings fell to just below 20%. Trouble!
More troubling signs come from Statistics Canada’s recent employment report. Manitoba has no more full-time jobs now than it had two years ago in August 2012. Immigration is slowing and more Manitobans are leaving the province than other Canadians are moving here. As well, Manitoba’s average wage is among the lowest in the country. About 30% of households are considered to be of lower-income according to Stats Canada, and 20% of Winnipeg residents have accessed the city’s food banks.
From all of this, it’s clear that Winnipeg house owners shouldn’t expect further price appreciation in the near term for their property. Worse, there is a real risk that current values will fall. We shouldn’t put up our homes for sale on spec unless we have to. Listings are very high and sales slow. Prices are not galloping upwards anymore. Manitoba is not “growth country.”
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