Keith W Hern
Managing Broker, KH Realty Limited
The 2012 B.C. property assessment notice should have arrived in your mailbox by January 20; if it has not, call toll-free 1-800-668-0086 to find out why.
Every year, B.C. Assessment 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 and consider other factors such as size, age, condition, view, and location.
Analyzing the B.C. assessment values over the 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 percent per year. This abnormally high escalation can be attributed to the spinoff from the development of Kicking Horse Mountain Resort, which created a strong seller’s market.
In 2008, the American real estate bubble burst as the subprime 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 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 largely by the Bank of Canada lowering the bank rate, which allows the banks to lower mortgage rates.
In February 2007, the average residential mortgage rate for a five-year term was 6.00 percent.
Last week, most of the big banks in Canada began offering 2.99 percent fixed-rate mortgages for up to five-year terms, the lowest in my 60-year memory. These unprecedentedly 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 at a 2007 rate of six percent.
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 percent, the banks have made housing more affordable and effectively bolstered values by 35 percent.
The resort sector of the housing market, which has not received the same level of support from the banks, has suffered approximately 35-40 percent declines in real estate prices.
The housing market in America has seen a similar decline, resulting in many 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 percent 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.
Canada’s House prices may decline by 20-35 percent 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 percent.
