H/T to Tim Ayres for the graphic.
Peak average price for a Victoria single family home was April 2008 at $626,000. In September 2009, average prices hit $619,000. In April 2008, the average mortgage interest rate for a 5 year term was roughly 7% before discounting. In September 2009, the average 5 year term was 5.5% before discounting. Folks, we have a conundrum.
Mortgage rates for 5 year fixed terms are on the rise. Mortgage rates for variables are starting to drop because lenders are discounting them again in order to keep their sales volumes up.
The graph above clearly demonstrates the disconnect between mortgage rates and payments that occurred over the past 5 years because of escalating prices. Is this a permanent disconnect or a bubble signal?
Have we reached peak average prices based on average income affordability? I think we have. I believe that prices corrected between April 2008 and January 2009 because, first, we reached peak price based on affordability, and second, we then had significant supply increases due to weakening demand.
We have no more mortgage wiggle room. Unless the powers that be extend amortization periods again (that ship has sailed IMO), the only affordability room that economically exists is on the price side. From here on in, for every percent that interest rates rise, there will be (the laws of economics demands there must be) a corresponding drop in prices to correct for affordability. Any further increases in average prices will be attributable to a disproportionate number of million dollar plus homes selling month to month (much like we witnessed in September).