Sunday, February 24, 2013

More than the monthly

We know that low rates have made housing more affordable on a monthly basis, and likely were the main reason that the crash in 2008/2009 was arrested and re-inflated.  Considering that most real estate purchases are financed, rates are a critical component to determining whether our high prices can still be paid by Victoria residents.

However, just because low rates bring down the payments doesn't mean that the mortgage is equivalent, or that it carries the same risk as a lower mortgage at a higher rate.

For example take two 25 year mortgages with identical payments of $2000/month.

Mortgage A
Rate: 3%
Principal: $422,614
House price (20% down): $528,267

Mortgage B
Rate: 5%
Principal: $343,876
House price (20% down): $429,845

In both cases the payments are the same.  However there are some key differences.

First there's the effect of rate increases.  Assuming that after 5 years when you renew, rates have risen by 2%.  Mortgage A is now at 5%, while Mortgage B is at 7%.   Payments for Mortgage A increase by $373/month while the holder of Mortgage B only has to find an additional $341.

More important though is the effect of additional payments.  Say Auntie Deardra passes away and leaves you $30,000 that you put against your principal.  With Mortgage B that one-time payment saves you $63,000 in interest costs and cuts your amortization down to just over 21 years.  With Mortgage A, poor Deardra's life savings will only buy you a $31,000 savings and an amortization of 22.5 years.
Same goes of course for any accelerated payment schemes.  Bi-weekly payments with Mortgage A will save you $22,000 and 2.8 years.   With Mortgage B you save a whopping $43,000 and 3.6 years.

On a monthly payment basis we aren't so far off historical norms.  But as usual, a low rate environment means savers are punished and those that want to pay their mortgage off earlier will have a much harder time than previously.

18 comments:

CS said...

@Leo: " Inflation is at a 3 year low and slowing."

The C$ is off six cents against the US$ since October.

Seems to me that goes some way to explaining why Safeway were offering moldy cauliflower at $2.49 a pound yesterday.

Here's an interesting picture of money supply growth over the last few decades, with M1 up more than 16-fold between 1976 and 2010, and currently growing at around 12% a year, or doubling every six years.

Looks highly inflationary to me.

Although a RE dip may have occurred — although we're not quite sure even about that — it might be rash expecting it to continue against the rising spring tide. My bet is that only a rate increase will push RE down significantly.

Leo S said...

Seems to me that goes some way to explaining why Safeway were offering moldy cauliflower at $2.49 a pound yesterday.

I think i'll take the CPI over the SCI (safeway cauliflower index)

Although a RE dip may have occurred — although we're not quite sure even about that — it might be rash expecting it to continue

Market conditions better improve quickly if the decline is to stop here.

koozdra said...

The market decline is being triggered by the winding down of the CMHC. A rate hike is not necessary.

a simple man said...

A lot of sales in OB in the past week. What is that all about?

Leo S said...

Spring market. It can't stay away forever.

a simple man said...

Hopefully just capturing the last few that don't read this blog!

Dave said...

CS My bet is that only a rate increase will push RE down significantly.

You have it backwards. Like 2008-9, falling rates and loonie will go with falling RE.

Money growth (M1 or M2) has little correlation with inflation. Notice the R value. Like now, there have been many periods of 10% money growth coinciding with no inflation. There are many factors that can cause inflation - supply growth is far down the list.

Dave said...

Looks like one province is experiencing outright deflation.

koozdra said...

What's the deal with gas prices? It changed three times yesterday.

Marko said...

Hopefully just capturing the last few that don't read this blog!

Quite a few accepted offers in Oak Bay too right now, just haven't gone pending.

a simple man said...

Like Oakdowne, Dunley, Wooten.

a simple man said...

apparently, Vancouver is on course for a 30% sales decline, year over year. That will really hit hard there. Us by extension.

CS said...

Looks like one province is experiencing outright deflation.

LOL. So you think because energy prices dipped in Alberta 12% annual growth in MI won't affect the general price level?

Seems highly optimistic to me. energy prices are slumping in Alberta because they can't pipe the stuff anywhere. The Rockefellers have pumped millions into the "environmentalist" campaign aganst the XL pipeline and Christie Clarke has turned environmentalist for the election, which means no Westward outlet either.

Dave said...

"...12% annual growth in MI won't affect the general price level?"

Not that it matters, but M1 growth has slowed to 8.7% growth (M2, 6.5%) from your stated 12% from a few years ago. If you ever need help in collecting current data, I'm happy to help. And, if by "won't affect the general price level" you meant increase the CPI - then yes, it's not really up for debate, as we have the latest data. Alberta for example, is experiencing CPI deflation, even though we've had years of elevated money growth.
Btw, your mention of the WCS(oil) discount doesn't lower what consumers are being charged for gasoline at the pump - a highly weighted item in the CPI. Our loss is, American refineries gain.

DavidL said...

@Dave
The core CPI excludes the price of gasoline...

Core CPI: The CPI excluding eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components.

Dave said...

DavidL
We were discussing headline CPI, not the core CPI.

The core CPI for Canada right now is higher at 1.0% (last 12 months).

CPI is 0.5% (includes gasoline). Alberta CPI is -0.5%. BC is 0.3%.

Marko said...

Monday, February 25 2013 8:15am

MTD February
2013 2012
Net Unconditional Sales: 322 497
New Listings: 889 1,318
Active Listings: 4,031 3,977

Please Note
•Left Column: stats so far this month
•Right Column: stats for the entire month from last year

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