Scarborough

Larger mortgages a factor in higher home prices: study

Tuesday, August 29, 2017

Over the past 17 years, Canadians have been able to qualify for larger mortgages due to declining interest rates and rising incomes, which has more than likely translated into higher home prices, finds a new study by the Fraser Institute.

“Increased borrowing power, brought about by falling interest rates and rising incomes, is potentially the most overlooked and least understood factor influencing home prices across Canada,” said Neils Veldhuis, president of the Fraser Institute, in a press release.

The study, called Interest Rates and Mortgage Borrowing Power in Canada, found that between 2000 and 2016, interest rates fell from 7.0 to 2.7 per cent, which increased the maximum mortgage size that home buyers were able to qualify for by 53 per cent.

Rising incomes across Canada during that time – also up by 53 per cent nationwide – accentuated home buyers’ increased borrowing power.

Together, falling interest rates and rising incomes increased Canadians’ mortgage-borrowing power by 126 per cent.

Of the country’s major urban centres, Calgary saw the greatest increase in mortgage-borrowing power at 161 per cent, topping Vancouver (118 per cent), Montreal (115 per cent) and Toronto (100 per cent).

“This increase in borrowing power – in simple terms – means that an average Canadian family, dedicating the same share of their income to monthly mortgage payments, can afford a mortgage that’s more than twice as big now as it would have been in 2000,” said Veldhuis.

This increased ability to borrow means that those bidding on a home can bid up the price of homes since the supply of housing is not immediately responsive to changes in demand.

“As would-be home buyers and governments contend with rising prices across Canada, policy makers should look closely at the impact of interest rates, rising incomes and increased mortgage borrowing power on home prices,” added Veldhuis.

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