Keith W Hern
Managing Broker, KH Realty Limited
The 2012 B.C. property assessment notice should have arrived in your mail box by January 20; if it has not arrived call toll free 1-800-668-0086 to find out why.
Every year B.C. Assessments estimates the market value as of July 1 for all property in B.C. based on its physical condition as of October 31.
Changes in property assessments reflect the movement in the local real estate market and can vary greatly from property to property.
When estimating a property’s market value, B.C. Assessment professional appraisers analyze current sales in the area, as well as considering other factors such as size, age, condition, view and location.
Analyzing the B.C. Assessment values over that last 12 years gives some interesting insights.
The B.C. Assessment value for a typical house in Golden doubled from $169,900 in 2000 to $349,000 in 2007, the peak of the real estate market; this equates to an average compound increase of 10 per cent per year. This abnormal high escalation can be attributed to spin off from the development of Kicking Horse Mountain Resort creating a strong seller’s market.
In 2008, the American real estate bubble burst as the sub-prime mortgage debacle unfolded. Real estate values in America crashed, however the real estate values in Golden have yet to feel the effects of the recession.
From 2007 to 2012, the value of a typical house in Golden has increased slightly to $379,000, even though we are now in a strong buyer’s market and one would expect values to decline. This can be explained in large part by the Bank of Canada lowering the bank rate, which in turn allows the banks to lower mortgage rates.
In February 2007, the average residential mortgage rate for a five-year term was 6.00 per cent.
Last week, most of the big banks in Canada began offering 2.99 per cent fixed-rate mortgages for up to five-year terms, the lowest in my 60-year memory. These unprecedented low interest rates are intended to bolster the real estate market in Canada, as lower mortgage rates make homes more affordable, in an attempt to deflate the Canadian real estate bubble in a controlled manner.
For example, homeowners with an annual household income of $60,000 could dedicate approximately 30 percent to mortgage payments of $1500 per month.
Based on a 25-year amortization period, a monthly payment of $1,500 would support a mortgage of $234,446 in 2007 rate of six per cent.
Today the same monthly payment supports a mortgage of $317,300 at a mortgage rate of 2.99 percent.
By lowering the mortgage rate to 2.99 per cent the banks have made housing more affordable and effectively bolstered values by 35 per cent.
The resort sector of the housing market, which has not received the same level of support from the banks, has suffered approximately 35-40 per cent declines in real estate prices.
The housing market in America has seen a similar decline resulting in a huge number of foreclosures.
How long can the Canadian banks prevent the Canadian real estate bubble from bursting by lowering mortgage rates?
According to the Economist’s global house price indicator published November 24, 2011, which compares house prices to rents, housing prices in Canada are 21 per cent overvalued compared to rents. In contrast, the American housing market, which began to decline in 2008 and has yet to stop falling, is now undervalued.
House prices in Canada may well decline by 20-35 per cent in the next five years.
New homeowners tempted by low mortgage rates should consider what the market might look like when it comes time to renew the mortgage in five years if rates return to a more normal range of seven per cent.