Why Richmond and Greater Vancouver home prices are so high?
The main driver for Richmond and Vancouver home prices reaching current level is ease of financing, The average family income in Greater Vancouver assuming to be around $65,000 can only afford a $325,000 mortgage (using 5% interest rate and 35-year amortization). It will appear that the average home owners can only afford to buy townhouses or condos as detached homes are out of reach.
Longer amortization and low interest rates
The availability of 35-year amortization and ultra-low interest rates allow an average home buyer to buy a home 40% higher in value, as compared to the market conditions some 10 years ago. Easy credit, financial innovation and low interest rates have now resulted in home prices reaching an un-sustainable level. See chart below.
While longer amortization and low interest rates may account for some 40% higher in home value, the average Greater Vancouver home price around $910,000 is around 69% higher than the base trend-line price around $540,000.
Market confidence
The price difference between $910,000 and $756,000 may be attributed to buyer confidence. This may contribute to lift the average home price above the trend line. Those home owners who entered the market prior to 2004, are well cushioned and can weather a price decline of 30% or more.
What happens if interest rate rises, and market confidence collapses?
When the market sentiment turns and confidence disappears, home sellers will swarm the market. The important ratio to watch is the supply/demand ratio or "months of inventory". A reversal in the current ratio around 2.5 months to 6 months supply or more, will put pressure on selling prices resulting in a decline in home prices.
Duration of price decline
Over the next few years, mortgage payment will go up due to higher interest rates, and rental rates may decline due to the increase in rental stock. Declining home prices and higher mortgage cost will result in more investors wanting to sell their rental properties. A more balance market will likely returned after a decline of 20% or more in home prices.
A home buyer should buy a home based on his or her own comfort level and ability to carry the mortgage commitment. Click the link to view Vancouver and Richmond homes currently listed for sale.
