It is commonly accepted that housing prices and interest rates are inversely proportional to each other. When interest rates rise, prices drop – and when interest rates drop, prices rise. I’ve often wondered how closely prices and interest rates may track each other. Until recently, I didn’t have a good enough data set to try to come up with an answer. Thanks (again) to Leo S’s efforts collating historical housing and financial data, I was able to produce a chart to compare the three-month average of the median Single Family Home (SFH) selling price with the three-month average of the available 5-Year lending rate (as published by StatsCan CANSIM v122497). A three-month average was chosen to “smooth out” any month-to-month volatility while maintaining the general trend.
Examining just Single Family Home (SFH) prices excludes those who are (or are considering) living in a townhouse or condominium apartment. However, with the larger principal mortgage amount incurred with buying a SFH, the effects of compounding interest imply that a SFH with a larger price tag would be affected more by interest rates than compared with less expensive real estate. Here’s what the results look like:
Note that I have charted SFH prices and the lending rate on reversed axes because prices and interest rates are inversely proportional. That is, as interest rates drop – prices go up. Or do they? Sometimes other factors may have been at work …
2000 – 2006: Heating Up
As rates steadily decreased from 8.50% to about 5.25%, SFH prices rapidly shot up. Note the lag time between interest rate drops starting in post 9/11 and the minimal SFH prices changes until 1½ years later. Only then did the market really begin to heat up and get some momentum. Even when interest rates were relatively flat between mid-2003 and early 2005, prices continued to quickly climb.
2006 – 2008: The Sky’s the Limit
Between 2006 and 2008, interest rates climbed by more than 1.50%. At the same time CHMC introduced a 40-year amortization, effectively lowering the mortgage payments. Is it any wonder that prices kept on rapidly increasing? Warning signs about the Global Financial Crisis started in 2007, but it wasn’t until mid-2008 with the sub-prime mortgage crisis in the US (and the resulting lack of available credit) that Victoria’s housing prices began to rapidly cool.
2009 – 2011: Crash and Rebound
In November 2008, emergency interest rates were introduced to “stimulate” the credit market. Not too surprisingly, the 1.25% drop in interest rates re-inflated the housing market with prices surging to all-time highs in the spring of 2010. The phrase: “I have to buy before I’m locked out forever” was common around the water cooler (or Brita jug).
2011 – 2014: Stagnation
Since 2011, a steady but slow decrease of interest rates didn’t seem to have any positive effect on SFH prices. During these fours years, SFH prices slid by about 5% to 10% (depending on the neighbourhood). When factoring in inflation, the actual drop in prices was even more.
2015: Seller’s Market
With a 0.25% drop in the overnight rate by the Bank of Canada and a 0.15% drop in the average mortgage rate – suddenly we have a seller’s market (in the core) with very low inventory and high sales volumes. The median price has climbed, but could it be that more higher-end homes are selling? Are the low interest rates the only reason for high sales volumes, or could the concern about an impending rise in fixed interest rates be stimulating sales? It’s like 2010 all over again!