"Increased borrowing power, brought about by falling interest rates and rising incomes, is potentially the most overlooked and least understood factor influencing home prices across Canada," Niels Veldhuis, president of the Fraser Institute, said.
In its new study, Interest Rates and Mortgage Borrowing Power in Canada, the institute found mortgage interest rates fell from 7% to 2.7% between 2000 and 2016 and increased the maximum mortgage for Canadians by 53%.
“Based on average family incomes in 2000, falling interest rates resulted in increased mortgage borrowing power in the four main regions over the same period: Vancouver from $183,751 to $280,893; Calgary from $221,214 to $352,671; Toronto from $221,214 to $338,161; and Montreal from $171,692 to $262,459,” the institute said in the study.
Incomes increased in lockstep, jumping 53% nationwide – and contributing to even more purchasing power among Canadians.
And the results have the Fraser Institute warning policymakers about the potential implications of increased borrowing power on home prices.
"This increase in borrowing power -- in simple terms -- means that an average Canadian family, dedicating the same share of their income to monthly mortgage payments, can afford a mortgage that's more than twice as big now as it would have been in 2000," Veldhuis said. "As would-be homebuyers and governments contend with rising prices across Canada, policy makers should look closely at the impact of interest rates, rising incomes and increased mortgage borrowing power on home prices."
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Canadians have qualified for much larger mortgages over the past two decades due to record-low interest rates, and that has impacted affordability according to the Fraser Institute.