Home > real-estate > GTA Housing Update – Real vs Nominal

GTA Housing Update – Real vs Nominal

As previously mentioned, I have been posting some stats/chart on Greater Toronto Area (GTA) housing market and only now am I trying to fully understand the dynamics…

David Leonhardt at Economix (NY Times) has an interesting post on mortgage rates and (real) house prices

“Anyone who argues that home prices do not seem headed for another big decline will probably hear some version of this question. Interest rates are historically low right now. They will surely rise at some point. All else equal, higher rates should push down home prices.”

This got me thinking about the Canadian housing market – is there a correlation between mortgage rates and house prices? The following chart plots the average (nominal) house prices in Greater Toronto Area (GTA) against the 5-year (undiscounted) mortgage rates… the right half of the graph i.e. circa 1990 onwards, there is clear negative correlation between house prices and rates i.e. rates going down pushes house prices up.

David correctly points out that this relation didn’t hold in 1980s when mortgage rates shot up… house prices kept increasing!

David concludes:

“My best guess for why the two don’t correlate more closely is the role that psychology plays in housing markets. Prices just don’t move as quickly as economic theory suggests they should.”

Jake at EconomPic compares real house prices with real mortgage rates… see chart for GTA below

Note: The right scale showing real mortgage rates is inverted to better emphasize the correlation

Caveat: I’m using really crude data here: Average house prices instead of an index like the Teranet House Price Index… Unfortunately there is no index for Canadian house prices prior to 1990s.

The only conclusion I can draw from the real prices/rates chart is that Real Rates lead real house prices… the green line follows the direction and trend of the red line with a lag factor. This reinforces my conclusion from yesterday’s post that another demand push might be in the cards due to “ultra low mortgage rates”

  1. September 22, 2010 at 11:40 AM

    Try to compare pocket by pocket. Like single family in Don Mills. That woill show you a very interesting trend too. Nice post, thanks.

    • September 23, 2010 at 5:51 PM

      thats too much effort 🙂

      i prefer higher level trends… know where I can get GTA household income information (besides Census)?

      • September 26, 2010 at 11:49 PM

        I shall try to get you some stat. I had an excel file somewhere. But would be few years old. StatsCan ran by our money but if we need any stat we gotta pay. Sad. If I forget to send then please remind me.

      • September 28, 2010 at 5:16 PM

        I completely agree with you on paying for StatCan data… its funny, some of the StatCan data is available free from OECD!

  1. October 3, 2010 at 11:41 AM

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