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Wednesday, May 03, 2006

Prices Set Records, but Housing Still "Affordable"

This article from the Edmonton Journal compares today's real estate market with that of spring 1981, when housing prices hit a record level. By including inflation, today's mortgage payment is actually still less than the previous records in 1981. Here are the details...

Ron Chalmers, The Edmonton Journal
Published: Wednesday, May 03, 2006

EDMONTON - Edmonton-area home prices have soared for five years, yet have barely reached the heights of 1981 -- after adjusting for inflation.

With today's low interest rates, the monthly costs of home ownership remain far lower than during the ruinous inflation of the early 1980s.

In April 1981, average home prices hit a then-record level of $94,223 before slumping all through the '80s.

Exactly 25 years later in April 2006, prices "hit a new all-time high of $226,846," the Edmonton Real Estate Board reported Tuesday.

After adjusting for inflation, however, that figure compares directly to prices of 25 years ago. In today's dollars, homes sold in 1981 for an average of $213,359.

But prices are only half of the story.

With a further adjustment for mortgage interest rates, the monthly cost of home buying now is far less than in 1981.

Anyone buying an average Edmonton-area home today, with a 10 per cent down payment and a mortgage rate of 6.75 per cent, amortized over 25 years, would pay about $1,400 per month.

In April 1981, with mortgage rates at 16.5 per cent, the payment on an average home was about $1,150 -- or $2,600 in today's dollars.

"This market is nothing like the '80s boom," Madeline Sarafinchan, president of the Edmonton Real Estate Board, said Tuesday.

"Mortgage rates remain low and consumer confidence is high," she said. "Housing is not overpriced."

Resale homes are priced below new construction, and foreclosures are not rising, Sarafinchan said.

Research in the U.S., where prices have surged in the past decade -- after two decades of slow growth -- also has found little sign of a housing price bubble.

"Recent price growth is supported by basic economic factors such as low real, long-term interest rates, rapid income growth, and housing price levels that had fallen to unusually low levels during the mid-1990s," reports the National Bureau for Economic Research in its April, 2006 NBER Digest. It cites a recent study of 46 U. S. housing markets, which found that prices have not been fuelled by speculation. "Expectations of outsized capital gains appear to play, at best, a 'very small role' in house prices," the Digest reports.

It cautions that a rise in real, long-term interest rates or a decline in economic growth could cause prices to fall.

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