Luxury home prices rising fast
Mortgage debt ramping up fast as cheap money fuels leap in high-end home prices
TORONTO — A new report from the Canadian Imperial Bank of Commerce says prices for the country’s most expensive highend homes are rising much faster than the overall market, skewing average values.
The report, released Wednesday, from deputy chief economist Benjamin Tal and shows the top 10 per cent of detached homes in Vancouver, in terms of price, have risen between 200 per cent and 250 per cent in value over the past decade. The bottom 10 per cent of detached homes, by price, have only risen about 50 per cent during the same period.
“There are two markets and they are not even talking to each other,” Tal said in an interview, referring to the differences between the high end of Vancouver’s housing market and the low end.
He also waded into the controversial issue of foreign ownership, saying the most expensive end of Vancouver’s detached home market is likely being driven by overseas buyers. “They’re not just buying condos. I think this is where you are seeing the foreign investor.”
The issue of foreign ownership has even caught the eye of Prime Minister Stephen Harper during the election campaign. He vowed last month do something if “foreign ownership non-resident buyers” are found to be driving up the cost of housing.
Tal noted that Toronto market has slightly different characteristics than Vancouver because price gains start to decline among the 10 per cent most expensive homes in the city. By comparison, the bottom 10 per cent of homes in Toronto have actually outpaced a similar subset in Vancouver with about a 75 per cent increase in price over the past decade.
“The average price in Vancouver is almost meaningless,” said Tal, adding affordability may not be as stretched on the lower segments of market as imagined based on the mean price of homes.
Last month, Canada Mortgage and Housing Corp. took the same stance on Vancouver’s homes when discussing the risk in the city’s market. CMHC’s chief economist Bob Dugan noted “in the first quarter of 2015 the top 20 per cent of houses in Vancouver sold for an average of $2.2 million, while the other 80 per cent had an average price of $550,000.
Tal said the risk in the market is not so much default. He noted in his report that mortgage arrears were just 0.3 per cent of all outstanding mortgages in June.
“The issue is that if you have 25 per cent or 30 per cent down payments, those people will not walk away from their assets,” said Tal, referring to what may happen to those consumers if interest rates start to rise. “But you might have reduced economic activity. If you are stretched, you spend less. That’s the risk (to the economy), those people don’t spend on anything else.”
But he leaves no doubt that mortgage debt is rising fast — it reached $1.2 trillion outstanding in the second quarter of 2015. Five years ago it was $923 billion. But the low interest rate environment that has seen variable rate mortgages drop below two per cent has consumers actually paying less interest.
Tal’s own calculations are that interest payments were only $78 billion in the second quarter of 2015, a third consecutive quarter that payments have declined.
“That’s why it’s an interest rate insensitivity story,” said Tal, adding it’s not something that is affecting all Canadians. “The home ownership rate is no longer rising but those who take debt are taking more debt because of the increase in house prices.”