There has been much discussion on this blog about what did (or didn’t) happen with the housing market in Greater Victoria during the 1980’s and 1990’s. As a teenager, I witnessed firsthand the “housing crash” in Victoria the early 1980’s. In 1980, my parents separated and a year later they decided to sell the “family” home located on Ten Mile Point. I remember the agent from Realty World valiantly holding open houses and nobody showing up. After sitting on the market for more than a year and only two showings, my parents agreed to take the house off the market and they worked out a payment plan for my father to slowly buy my mother’s “half” of the house.
Between 1978 and 1981, the 5-year fixed mortgage rate jumped from 10.59% to 18.15% (a 71% increase), such that the sales volume plummeted extraordinarily low. Only a few people could afford such high interest rates, so it’s no wonder that single family housing (SFH) prices plummeted down from an average high of $126,776 in 1981 to $93,865 in 1985. However, the actual inflation rate at that time was extraordinarily high, such that if evaluated in constant 2015 dollars: the average SFH price in 1981 was $325,776 dropping to $189,518 in 1985 – a staggering 42% drop! I remember walking through a nearby subdivision called Wedgewood Point Estates, where I witnessed many homes built and purchased in the late 1970’s up for sale again. The new owners just couldn’t keep up with the mortgage payments and I remember that close to 1 in 3 houses in that neighbourhood (of $250K+ houses) being up for sale. Some owners went bankrupt when they couldn’t sell their high-end luxury homes.
By 1985 the 5-year interest rates had dropped to a more moderate 11.5%. I remember wishing I had the $7500 to make a down-payment on a decent starter home selling for $69,000. With making just $5.50/hour – home ownership just wasn’t in my cards at that time! SFH prices eventually recovered to the “peak” they reached in 1981, but it wasn’t until 1992 (eleven years later) – after accounting for annual inflation. During the 1990’s, fixed mortgage rates dropped almost in half from 13.24% in 1990 to 6.90% in 1998. As rates dropped, prices went up and peaked in 1994. Even as mortgage rates continued to drop, prices continued to slide down a bit – after accounting for inflation. It wasn’t until 2003 (nine years later) that SFH prices matched their peak in 1994.
It’s interesting to note that during the high-interest years in the 1980’s that the average selling price and mortgage rates were directly proportional. After the housing bubble burst in 1981 and interest rates started to drop, and so did SFH prices. I’m sure that this had more to do with risk-averse consumers trying to keep their financial heads above water rather than with the fundamentals of budgeting (where dropping interest rates and rising prices = the same monthly payment). By 1990, markets and wages were stabilizing such that the SFH prices and interest rates started to become inversely proportional. Mortgage rates dropped by a third from 13.24% in 1990 to 8.7% in 1993. Average SFH prices (in constant 2015 dollars) rose almost a third from $290,660 in 1990 to $380,004 in 1994. With a stagnating BC economy in the mid-1990’s, the pattern flipped back to directly proportional with prices continuing to slowly erode in spite of further drops in the 5-year mortgage rate. Starting in about 2000, the inversely proportional pattern reemerged – with mortgages rates dropping and prices climbing. With the exception of the 40-year amortization introduced during 2006-08, just before the Great Recession – the inversely proportional pattern has persisted for the past 15 years (covered in more detail in my Housing Prices Follow Mortgage Rates? blog post).
History seems to suggest that when the economy is suffering that both mortgage rates and prices will drop in tandem, but the dropping rates always trigger an eventual rise in prices until the next crisis emerges. What’s clear is that there have been some great times for buying (such as 1986, 2001) and some great times to sell (1981, 1994). Inflation-adjusted peak to recovery (same SFH price) patterns seem to occur about every 10 years (1981 to 1992, 1994 to 2003), with inflation-adjusted peak to peak every 13 years or so (1981, 1994, 2008) or so.
However, the ultra-low rates introduced in response to the Great Recession may have changed the narrative. As shown in my Affordability (Part 1) blog post, the monthly payment required to buy an average SFH in Victoria peaked in 2008. Does this suggest prices will climb to similar levels by 2018 (10 years) with another peak in 2021 (13 years)? With mortgages leveraged so much more than any other time in the past 50 years, and the levels of household debt breaking new records each year – I truly think that we have arrived a new paradigm. As an investment broker would say: “Past performance does not guarantee future results.“
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[Edit:] From the comments, it seems that there is a keen interest in comparing prices are rates from other time periods as well. So, here is the “definitive” chart of the Average SFH Prices and 5-Year Mortgage Rate from 1960 through 2014 … Enjoy!