What’s next for our housing market?
Changes to mortgage rates expected to create ripple effect for industry
They can’t go lower, can they? And what if mortgage rates start to climb? Could that be the last straw for the housing market?
It’s tough to make a pan-Canadian call on where real estate will land in 2013. The Prairie provinces already seems posed to avoid the downturn, but sales are starting to fall in other markets with a price dip happening already or predicted to be on the horizon.
All this is happening with five-year closed mortgage rates below three per cent, even at some of the big banks. The 10-year mortgage, still not popular with Canadians, is down to 3.64 per cent.
It’s not a stretch to think the rate on both of those terms will climb two percentage points.
And what of the prime lending rate? It’s still three per cent, but tied to the Bank of Canada, which has been threatening to raise rates for months.
Rates could also go lower, but one problem might be antagonistic Finance Minister Jim Flaherty, who keeps warning the banks not to get into a so-called “mortgage war” by lowering rates.
This month, Manulife Bank buckled under pressure from the Finance Department and raised its 2.89 per cent five-year mortgage back up to 3.09 per cent because of government concern.
“We think rates have to get to more normal levels,” says Craig Wright, chief economist with the Royal Bank of Canada, which said in a February report that one of the reasons home ownership has remained affordable is those low rates.
The bank’s affordability index shows the proportion of pre-tax household income required to service the cost of a mortgage, prop-
erty taxes and utilities. On a twostorey home it reached 47.8 per cent in the fourth quarter of last year, but that was down 0.3 percentage points from a quarter earlier.
As rates have dropped, consumers have been moving into five-year mortgages at a faster pace, says Wright. That will likely continue, if the fear is they are going to rise.
That’s a generally positive development because it means only a portion of five-year mortgages come due every year, so any interest rate shock is slowly worked into the market.
The real battle remains for first-time buyers. They already face tougher rules on eligibility for mortgages. They can only amortize over 25 years if they have mortgage default insurance, something required with less than a 20 per cent down payment.
That shorter amortization means higher monthly mortgage payments and ultimately qualifying for a smaller loan. A spike in interest rates would just push the first-time buyer further out of the market. “Across Canada, in many parts housing, is still affordable,” says Wright.
“A couple of markets — those that were looking stretched, Toronto and Vancouver — are starting to correct, and that’s not a bad news story as long as it’s a cooling and not a collapsing.”
Royal LePage Residential Services chief executive Phil Soper sees a decline in prices coming in the third quarter of 2013, but for the most part interest rates are offering some protection.
“It’s very difficult to conceive of a sharp downturn in this market when mortgage rates are so low,” says Soper.
“There is absolutely no sociological change in people’s desires to own homes. Young people want to be part of the 70 per cent of Canadians who own homes.”
Across Canada, in many parts, housing is still affordable Craig Wright RBC
The price decline he predicts is a national number, meaning some local markets will probably need those low mortgage rates as they try to recover from a steeper downturn.
“With interest rates the way they are today, much of the correction in the Vancouver market will have worked its way through,” says Soper.
“When people see a small opportunity, they leap in, particularly with mortgage rates where they are now.”
While rates remain low, new guidelines from the office of superintendent of financial institutions have had a bigger impact, says Martin Reid, president of Home Capital Group Inc.
Among the key changes has been a restriction on home equity lines of credit being no more than 65 per cent of the value of a home.
“There has been some scrambling to restructure products,” says Reid. “(The Office of the Superintendent of Financial Institutions) didn’t want 80 per cent HELOCs that were really only loans (where you paid the interest).”
In some ways, the consumer has grown accustomed to low rates because housing has been slowing in spite of the discounts.
“It was already slowing down (before the mortgage) rule changes,” says Reid.
“The low rates help, but employment has helped, too. It may not be stellar, but it is holding people in.
“People are working. People are still buying their homes, making their payments. Debt levels have been increasing so that risk is elevated, but they are able to service that debt.”
His company isn’t forecasting rates to go up. Even if they do, the increases are expected to be modest and occur gradually.
“A rapid rise in rates might be the concern,” says Reid. “That concern is off the table for now.”
Kelvin Mangaroo, president of ratesupermarket.ca, laughs when he thinks about rates going down even more.
“Over the past year, we’ve kept saying it can’t go any lower, it can’t go any lower,” he says.
“Sometimes, you break a certain barrier.”
The latest mortgage rate outlet panel he conducted with some experts in the industry came to the conclusion that fixed rates are going to be moving very much in the near future.
“I think what that means is it offsets what we have seen with house sales going down,” says Mangaroo.
“People still think they can afford their houses because interest rates are at an all-time low.”
He cautions that people really need to plan for a rainy day when rates will go up. That means having enough money to cover a mortgage based on that higher payment.
“We are already seeing some declines (in sales and prices) in some markets,” says Mangaroo.
What would happen if interest rates were actually to go up? He has no doubt.
“I think it would be the nail in the coffin,” says Mangaroo, adding he doesn’t see any rate hikes coming this year.
“The Bank of Canada doesn’t want to do anything that would hinder the economy right now.”