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The average monthly cost of financing a new home, based on an average five year fixed mortgage, dropped 1.7 per cent from a year ago even as housing prices moved up by 9.4 per cent, according to a new study released today by BMO Financial Group’s Economics Department.

The carrying cost of the average Canadian home is now 37.6 per cent of average household income, down from 38.8 per cent a year ago.

The report noted that despite higher house prices and rising interest rates, the actual monthly cost of housing has declined for those owners who opted for a five year fixed mortgage.*   During the May to July period monthly payments fell 1.7 per cent to $1,215 (based on a home purchase with a ten per cent down-payment and a five year fixed-rate mortgage and a 25-year amortization period).  This contrasts sharply with monthly payments based on a variable rate mortgage, which actually rose 18.5 per cent from a year ago to $1,081.

The study reported that the national average sale price for a house during the period rose 9.4 per cent from a year ago to $206,167. However, BMO economists expect that housing price increases will likely ease shortly as the markets react to the expected higher interest rates going forward.

“Although early summer mortgage rate reductions helped push July housing sales to record levels, we expect that a cooling trend will emerge over the next few months and should ease price pressures,” said Michael Gregory, Assistant Chief Economist, BMO Financial Group. “The steady stream of new and existing homes entering the market will also provide a check on housing price inflation.

“Although the current pace of new construction appears very high at well over 200,000 units per annum, the risk of severe overbuilding, the kind of which we saw in the late 1980s, is reduced by that fact that pent-up demand for housing has also been high.

“On balance we expect house prices to slow to the 5 per cent price increase range by early next year,” he said.

The BMO study also notes that, unlike the last housing boom cycle in the 1980s, the market is not expected to collapse but will, at worst, plateau over the next few years.

The report anticipates steady shorter-term interest rates and mildly rising longer-term rates through the end of this end with five-year rates at the 6.7 per cent level.  By the spring of 2004 even shorter-term rates will start to rise as both the US Fed and the Bank of Canada are expected to begin raising their policy rates.

The monthly carrying cost leaders for the major markets were Vancouver with a five-year term mortgage costing  $1,900 a month (down 4.9 per cent from a year ago) and Toronto at $1,791 a month (down 4.5 per cent from a year ago).  The lowest average housing carrying costs were located in the province of Quebec where an average home in Trois Rivieres cost $489 a month (down 8.7 per cent from a year ago) and in Saguenay-Lac Saint-Jean at $527 a month (down 6.9 per cent from a year ago).

On a province-wide basis the highest monthly costs were in British Columbia at $1,500 (down 3.5 per cent from a year ago) and in Ontario at $1,330 (down 2.6 per cent from a year ago.  On the low side were Prince Edward Island at $567 (down 13.1 per cent) and Newfoundland and Labrador at $695 (down 7.5 per cent).

*The five-year fixed-rate mortgage rate averaged 6.17 per cent for the period

The full BMO housing affordability report can be found at www.bmo.com/economic.

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