In the year 2000 the bank lending interest rate in Canada was 7% but by last year it had fallen to 2.7% while incomes increased, more than doubling the amount that homebuyers could borrow.
A study by the Fraser Institute has looked into the effect of this mortgage-borrowing power on Canadian home prices.
“Increased borrowing power, brought about by falling interest rates and rising incomes, is potentially the most overlooked and least understood factor influencing home prices across Canada,” said Niels Veldhuis, president of the Fraser Institute.
With a 53% increase in the maximum mortgage homebuyers can qualify for; and also a nominal 53% increase in income nationwide, the study says that equates to a 126% rise in mortgage-borrowing power.
“This increase in borrowing power—in simple terms—means that an average Canadian family, dedicating the same share of their income to monthly mortgage payments, can afford a mortgage that’s more than twice as big now as it would have been in 2000,” Veldhuis said.
Regionally, mortgage-borrowing power increased 161% in Calgary, 118% in Vancouver, 115% in Montreal and 100% in Toronto.
“As would-be homebuyers and governments contend with rising prices across Canada, policy makers should look closely at the impact of interest rates, rising incomes and increased mortgage borrowing power on home prices,” Veldhuis added.