CaptainTrouble
Based Member
Don't listen to any of the rhetoric you're hearing about how high rates are bad and we need lower rates to keep housing affordable. It's the other way around. High rates cause housing prices to decrease which makes housing more affordable not less.
I'll give you a quick rule-of-thumb estimate. If the 10-yr bond rate is 3.5% the discount rate for real estate might be about 7.5% (historic risk premium of 4% + 3.5 % bond rate as a proxy for the risk free rate of return). If your apartment has $24k ($2000/month) in rent, using a 35% cost basis, and the DDM for valuation, you get a property value of $353,600. With a 0.25% interest rate raise, the price decreases to $335,000. That's a decrease of $18,600.
To give you an idea on affordability:
At a price of $353,600 if you finance 75% at an interest rate of 10-yr Bond yield + 1.50% aka 5% (a typical historic spread) you need $88,400 as a down-payment and your mortgage would be $265,200. Amortized over 25 years at 5%, that's a payment of $1,550 with property taxes estimated at 1% being $295. You pay $1,845 per month.
At a price of $335,000 if you finance 75% at an interest rate of 10-yr Bond yield + 1.50% aka 5.25% (a typical historic spread) you need $83,750 as a down-payment and your mortgage would be $251,250. Amortized over 25 years at 5.25%, that's a payment of $1,505 with property taxes estimated at 1% being $279. You pay $1,785 per month.
Since your down-payment is $4650 less, you could invest that and earn 4% annually (conservative estimate) of $186/year or $16/month. Overall, the difference is $1,845-1,785+16 = $76/month.
So, a 0.25% rate increase reduces the price you pay for a house by $18,600 and you pay $76/month less in mortgage + property taxes costs. You also pay slightly less in insurance (difference is negligible but there.
Don't let anyone tell you higher rates are bad for housing. Higher rates are the best thing that can happen for housing in Canada.
I'll give you a quick rule-of-thumb estimate. If the 10-yr bond rate is 3.5% the discount rate for real estate might be about 7.5% (historic risk premium of 4% + 3.5 % bond rate as a proxy for the risk free rate of return). If your apartment has $24k ($2000/month) in rent, using a 35% cost basis, and the DDM for valuation, you get a property value of $353,600. With a 0.25% interest rate raise, the price decreases to $335,000. That's a decrease of $18,600.
To give you an idea on affordability:
At a price of $353,600 if you finance 75% at an interest rate of 10-yr Bond yield + 1.50% aka 5% (a typical historic spread) you need $88,400 as a down-payment and your mortgage would be $265,200. Amortized over 25 years at 5%, that's a payment of $1,550 with property taxes estimated at 1% being $295. You pay $1,845 per month.
At a price of $335,000 if you finance 75% at an interest rate of 10-yr Bond yield + 1.50% aka 5.25% (a typical historic spread) you need $83,750 as a down-payment and your mortgage would be $251,250. Amortized over 25 years at 5.25%, that's a payment of $1,505 with property taxes estimated at 1% being $279. You pay $1,785 per month.
Since your down-payment is $4650 less, you could invest that and earn 4% annually (conservative estimate) of $186/year or $16/month. Overall, the difference is $1,845-1,785+16 = $76/month.
So, a 0.25% rate increase reduces the price you pay for a house by $18,600 and you pay $76/month less in mortgage + property taxes costs. You also pay slightly less in insurance (difference is negligible but there.
Don't let anyone tell you higher rates are bad for housing. Higher rates are the best thing that can happen for housing in Canada.
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