October 14, 2022

What Does Affordability Mean in Today’s Real Estate Market?

There has been a tremendous amount of talk around affordability in the real estate market these past months, and rightly so.

We’ve watched the market ramp up and increase at double digit rates, and now interest rates have started to climb. It’s what many of us in the industry have been worried about and that it would trigger a collapse in the marketplace.

And it hasn’t happened.

Recently I sat down with one of our mortgage partners and had a discussion around affordability and what that means. We dug into what it cost to buy the typical family home at the peak of the market in April and what it looks like today in October.

The average 3 or 4 bedroom detached home in Guelph is approximately 2000 sqft with a finished basement. That home in April of this year, at the peak, sold for just over $1,000,000. The 5 year mortgage rate was 4.09% and the typical 20% down payment on that purchase would have been $202,834. That left $811,000 to be financed with payments, based upon a 30 year amortization of $3898 per month.

Fast forward to October of this year and that same detached home in Guelph is now selling around $775,000. That’s a decline of over $239,000. Yet interest rates are now at 5.54%, up 1.45% for that same 5 year, 30 year amortization mortgage.

Here’s where it gets interesting. The narrative up to this point is that home prices haven’t dropped enough to outweigh the increases in interest rates and mortgage payments. The comparison chart below shows that there is better affordability in the market today.

Let’s look at the math:

Down payment (20%) required for this home has dropped by $47,917 today to $154,917 ( 20% of $774,500) vs 20% of $1,014,173 for a $202,834 cash requirement.

The amount of mortgage required for this home has dropped by $191,668 to $619,669 and the mortgage payment amount has gone from $3,898 per month to $2,978 per month.

Those are some real world savings for borrowers just on the mortgage side of the equation!

Mortgage rates may have increased significantly over the past year and as the math shows, the affordability of the average family home has actually increased.

What most people are looking at is the increase in mortgage rates and assuming everything else has remained static. This illustration shows that the combination of a reasonably small decline in prices, means a consumer has to put less money down and borrow less money to make the move work.

The added benefit of this analysis is that if buyers already had the original down payment of $200K ready to go, they can reduce the mortgage amount and payments by keeping the downpayment the same $200K which now becomes a 26% down payment on the property.

This is a conversation Realtors and Mortgage professionals should be having with their clients and making them aware of the opportunity in the current market.

Next week, we’ll tackle this from the perspective of a first time buyer and see how unique their situation is.

Enjoy the weekend.

Paul

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SEPTEMBER 2022 MARKET REPORT

THIS REPORT CONTAINS

September summary & analysis for Guelph
Neighbourhood breakdown for Guelph
Full home type breakdowns for Guelph, Kitchener, Waterloo & Cambridge