How low interest rates fuel real estate bubbles

As regular readers will know, my folks were DPs who got off the boat at Pier 21 in '56.

Mom took care of the kids, and when the kids were all in school she made a few dollars cleaning the houses of the more posh folks in town.

Dad got a job at Kloepfer Coal, shovelling heating coal with a hand shovel.

As their language skills progressed, they moved on.

By the late '60s Dad was a real estate broker.

Being on the periphery of that business for a long time, I suppose it should be less than a complete surprise that in my woodshed-cleansing adventures I happened across a little tome entitled "Monthly payments for mortgages," put out by the Ontario Real Estate Association.

Probably from the late '80s or early '90s.

Here's what gave me a neck cramp; those tables start at 8% and go to 25%.

They could not even conceive of a mortgage rate under 8%!

The mortgage here at Falling Downs is 2.5%. When it comes up for renewal, I could be looking at three and a half.

Let's put that in perspective.

A hundred grand of mortgage at a rate of 16%, which is where rates went in the early '90s, runs you $1320 bucks a month.

Drop that rate to 12% and you're looking at just over a thousand a month.

At 8% you're under $800 a month.

At two and a half percent, we're at $450 a month.

By and large, folks don't look at the interest rate, they look at the monthly payment.

As the rates came down, the amount of house you could afford with your monthly payment inevitably went up and up and up.

That's why a starter home in a lot of places runs to 400k or more.


But don't worry; as rates go up and up, the price of the house you can afford with your monthly payment will go down and down.

Eventually a starter home will be just $100,000 again!