Affordability of homeownership continues to be a major concern, writes Peter Watson.
Many people dream of home ownership; however, the reality of owning a home does not depend on dreams but on simple arithmetic.
Some mistakenly think real estate values operate in a similar fashion to that of the stock market.
Comparing house values to the rise and fall of the stock market can be misleading. Stocks have a hundred-year history of increasing in value and then adjusting downward.
After these periods of downward adjustment, the value of the stock market has historically gone on to reach new highs. That’s just how the stock market works.
Real estate values are largely influenced by interest rates. If interest rates are low, as they had been prior to and during the pandemic, people could afford to carry a larger mortgage.
Increasing house prices was not a problem because of the low interest rates. Your house cost more… no problem. Just get a larger mortgage.
Many Canadians have a curiosity in real estate values. Even those that have no intent in buying or selling soon will be interested to know what the house down the road sold for.
Many of us seem to enjoy predicting future values of real estate. If that is of interest to you, I would suggest basing your curiosity of future real estate values on your expectations of future interest rates.
If interest rates decline and therefore mortgage rates decline, buyers will be able to afford a larger mortgage and therefore market pressure will lead to an increase in house prices.
Current interest rates might seem extraordinarily high when considering the more recent past. However, today’s high interest rates are in line of those several decades ago.
A key factor in the value of house prices is based on affordability and that is dependent on interest rates. The “arithmetic” of qualifying for a mortgage starts with the interest rate available.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
