Home Values & Mortgage Sizes

With home prices rocketing into new galaxies, one might think that loan-to-values are surging. After all, we’re bombarded with headlines about under-capitalized homebuyers struggling to get into the market.

In fact, loan-to-values have held steady for at least nine years running.

From March 2007—as far back as our mortgage balance data goes—to spring this year, Canada’s average home price jumped 70% to $508,567. (Source: CREA)

In that same time-frame, the average residential mortgage surged by a similar percentage: 71%, to $181,000. (Sources: RBC, 2007; Manulife, 2016)

Looking at this another way, the mean equity in a Canadian home nine years ago was 65% (in homes with mortgages). Today, it’s about the same.

Interestingly though, the average mortgage amount has risen $75,443 over the last nine years. But the mean value of a Canadian home has surged almost 2.8 times that, or $209,190. That’s a sizeable net gain in nominal dollar equity.

Of course, what the market giveth the market can taketh away. But that net equity growth, if it holds up longer-term, could be an essential store of wealth for so many with insufficient retirement savings.

Only 1 in 5 middle-income Canadians who are retiring without an employer pension have saved enough to retire comfortably, reports CBC. Imagine if they lost $100,000 to $200,000 of home equity to boot.

This is just one more reason why it’s so utterly essential that policy-makers stack housing policies carefully. It would be one thing for mortgage tightening to cause a correction, but it would be absolutely calamitous if it ever triggered a crash.

Sidebar: These are the average mortgage balances in Canada’s largest cities. How noteworthy that high-priced Toronto is only 7% above average. (Source: Manulife Bank)

$259,000 — Vancouver
$217,000 — Calgary and Edmonton
$194,000 — Toronto
$156,000 — Montreal

  1. > With home prices rocketing into new galaxies, one might think that loan-to-values are surging.

    Not really. Average loan to value should be dropping during a surge in prices. The fact that they aren’t should be concerning. Only a small percentage of people are first time buyers every year. Those people’s LTV will be increasing. But we have a 70% home ownership rate and all those people are benefiting from the surge in prices and should see a vastly reduced loan to value.

    But it seems that instead people are trading up their houses and taking on more debt, and extracting the equity they have. When the correction comes you will see that average LTV increase quickly.

    1. Hi Leo,

      Despite reality, some folks do indeed have this perception (that overall LTVs are significantly rising).

      Further to your point, certain factors tend to support LTVs, for example:

      * When people pay off their mortgage they fall out of the average mortgage size calculation.

      * While move-up buyers build dollar equity, they must pay more (like everyone else) when they buy a new home. And they usually get a higher-level home, which means they pay even more than inflation alone would dictate. This is quite normal. (What’s not so normal is how much more they’ve had to pay in some markets.)

      * Not all Canadians (cities) are seeing big surges in home prices.

      On the other hand, some of the factors supporting LTVs are problematic, such as rising consumer debt and stagnant wages. In those cases, I share your concern.

      One last general point while we’re on that topic. “Concern” is often relative. People in fast-growing markets with no need to upgrade are finding home appreciation significantly beneficial to their net worth. Of course, as you and I have noted, home values are not a one-way street. Real estate is generally a long-term investment, but it can get hammered in the medium-term. That said, I’d wager the folks who’ve seen their homes skyrocket would be a lot more concerned if prices had plunged.


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