Consider the downsides of rising interest rates
Recent comments from the Bank of Canada signalled the possibility — and perhaps probability — of an interest-rate increase this year.
This will have some obvious and not-so-obvious impacts on the GTA housing market.
Whether an increase will be announced in July, or in the first quarter of 2018 as previously predicted, the interest rate issue is less a matter of rates rising and more a question of when they will rise — and by how much.
For the resale housing market, an increase will have clear impacts on mortgages. Higher rates will mean higher payments for those seeking new financing, and either less disposable income or simply unaffordable ownership prospects.
Higher interest rates in normal market conditions should produce downward pressure on home prices. However the GTA housing market in 2017 can hardly be said to be experiencing normal conditions. And the magnitude of that downward force on home prices will be challenged by competing upward forces on prices, the result of continued structural challenges in the market, where there’s growing demand for housing thanks to population growth but woefully inadequate supplies.
Homebuyers can manage their risk in a rising interest rate environment by either locking into a rate early or matching their purchase price commitment to a financing rate.
For the new home market, the condominium market in particular, rising interest rates pose very different risks.
Those who have purchased presale condos and are waiting for their units to be completed over the next four years will have their purchase prices fixed via legally binding agreements of purchase and sale. But their mortgage rate cannot be secured. So for the first time in over two decades, those purchasers could be facing higher mortgage rates at closing than were present at the time of presale.
And most first-time buyers of new condos may not fully appreciate a condition known as interim occupancy. This is the time between the delivery of the new unit for occupancy and the time of the condominium building’s registration, when title can be provided by the builder, allowing purchasers to close on units and begin paying off their mortgages.
That interim period can last more than 10 months, especially as larger projects come online that present more complexities while underresourced government bodies are challenged to process final registration approvals amid an ever-changing regulatory framework.
For the purchaser, the concern here is twofold. First, interim occupancy interest — effectively paying rent on their own unit — could amount to more than $10,000. And second, these buyers have no ability to lock into lower mortgage rates sooner.
Necessity will need to be the mother of invention in 2017 as lenders, builders, homebuyers and government deal with the more than $10 billion worth of closings expected this year. George Carras is the president of RealStrategies Inc. and the founder of RealNet Canada Inc. (now part of Altus Group). His column appears in New in Homes & Condos once a month. For more information, visit realstrategies.ca.