Are buyers ready for higher rates?

Higher interest rates are coming.  You don’t even need to hear government spokespeople or bank economists say that to know it’s true.  With mortgage rates at record lows there’s really only one direction for them to go.  The question is how much longer they can be held down, and how quickly they will rise.

The C.D. Howe institute is the latest to raise alarms about the housing bubble risk created by record low interest rates:

The Ottawa-based public policy think-tank says many economists, including its own, are predicting rate hikes as much as a full percentage point or more later next year.

“Does the simple experience of short-term interest rates being so low, for so long, encourage people … to mortgage themselves more than they otherwise would, and buy a bigger house than they otherwise would … and get themselves into trouble longer term?” said C.D. Howe president and CEO William Robson.

On Tuesday, the Bank of Canada announced it would keep its key overnight rate at the historic low of 0.25 per cent. The C.D. Howe Institute says that is helping to create a false sense of security among borrowers who have taken on debts larger than they could normally afford.

Robson said a rapid rise in interest rates could prove devastating for homeowners who have not evaluated their ability to carry their mortgages at a higher interest rate.

Information on how many recent buyers could handle higher rates has been hard to come by, but when rates start to rise from their current record lows it will quickly become apparent if the recent mini-boom was driven by cheap credit.  Rising mortgage rates squeeze both ends: supply and demand.  Those that haven’t planned on payments at normal rates may find they need to sell just when there are fewer buyers due to increased carrying costs.

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"Could it be that they require 20% down?"

Highly unlikely since their upper limit is 25%, it would only catch a minuscule window of buyers.

More likely it will be 10/25 or 10/30, but even that would put a huge damper on things, they can't jump it up TOO quickly.

The other possibility, which would be more work but technically better would be to do a little more background on their clients and ensure that the families buying homes actually have the means to pay them off at 6-8%.


I have no problem with the CMHC underwriting mortgages with 5% down. The problem is that they are way too much of the market. They should bring back the caps and restrict to owner-occupied properties. There should not be government backing for "investors" in rental properties. That is just beyond absurd.


You should listen to the squeals down under from all those mortgage holders. Rates have risen what 1/2 a point in the last couple of months and banks are a 1/2 a point higher than reserve rate (higher cost of borrowing). Further, no sign the reserve is about to let its foot of the rate rise peddle. Even PM is weighing in on it blasting banks for their greed. Hah! Some already strong signs that the biggest housing bubble on earth (yes bigger than canadas) is about the explode. Stay tuned


Regarding @Henry: You may strongly support the view but the view is not strongly supported.


As a taxpayer, I would like the difference between what a house would cost without market interference from CMHC and its current distorted value returned to me.

[…] -Bureaucrats to ration homebuying in 2010? -BOC rates prompt housing boom bubble talk -Carney cautions borrowers to be ‘prudent’ -Vancouverites camp out to buy a condo -Property tax may take a leap -BOC warns of debt peril -Why didn’t Canada’s market pop? -Japan compared to USA and Canada -US Homeowners lost $5.9 Trillion since 2006 -Bubble concerns over low rates? Here’s an idea […]


as a taxpayer, I say yes please to such limitations.



"The proposed OSFI changes will significantly decrease access to affordable mortgage loans for first time Canadian home-buyers and apartment investors"

Great, "significantly decrease access" sounds good to me! Could it be that they require 20% down? And perhaps lower the amortization period? Take that, housing bubble! Imagine…people will actually have to have MONEY to buy houses! What a concept!


domus: interesting article, seems odd that the government would move away from socialized banking and real estate at this time; but hey it's canada nothing really suprises me.

ready to pop: in my opinion the u.s.a. is in serious decline irregardless of what interest rates are. u.s. gdp, capital and market capitalization are going down no matter what.


According to International Monetary Fund data, U.S. GDP has fallen to 24% of world GDP from 32% in 2001. And as U.S. capital escapes the weak dollar and high tax rates, the U.S. share of world equity market capitalization has fallen to 30% from 45%. This leaves the U.S. alone with Japan at the bottom of the monetary heap, with rate expectations so low they repel investment.

Near-Zero Rates Are Hurting the Economy


Makes sense, build up the bubble when it's working for you but then do a little bit here and there when it's inevitably over so you can claim you didn't just stand idly by but took steps to curb the bubble.


This is interesting, do you guys know anything about it? Federal Government Bureaucrats to Ration Home Buying In 2010 ….The proposed OSFI changes will significantly decrease access to affordable mortgage loans for first time Canadian home-buyers and apartment investors as the Canada Mortgage and Housing "(CMHC)" securitization program is curtailed by changes to the capital governance rules that will restrict a financial institution's ability to generate Government guaranteed loans or require an injection of capital (equity). …"These are exactly the consequences that most of the academics, industry and political parties have openly said they do not want as they are all supportive of retaining the CMHC programs (supporting over 900,000 housing units worth $148 billion in 2008) instead of curtailing them" said Paul. What drugs is this Paul guy smoking?? Which serious academics or industry group (apart from construction… Read more »


"All I can say is that having a housing boom during a recession and anemic recovery is fishy. Something stinks."

And I remember that all the previous RE booms were followed by a severe recession in this province. This one, however, wins the prize for being the most outrageous.

With the number of layoffs occurring lately, we're en route to a similar situation.

The bigger they are, the harder they fall.


Last Saturday I tuned into CKNW and listened to Ozzie Jurock's comments to Michael Levy about the housing market.

Ozzie promised that THIS coming Saturday, he would reveal some unbelievable stories of people who are highly leveraged in RE.

Tune in. It may be interesting…


@Anonymous: All the more reason it is fishy. It is too good to be true.


Interest rates alone are not the problem, the 30 & 35 year mortgages, complements of CMHC are what is really driving the bubble and making things worse. At 25 year mortgages, prices would not be as high, and risk of damage to higher rates would not be as severe.


This is very simple to me – nothing fishy about it – GICs pay almost nothing, the scars from mutual funds disaster are still fresh, the Canada savings Bonds pay 0.4% or something like that, which considering core inflation of three time this high will make any naive purchaser loose money…. well, people are desperate to invest their hard earned dollars somehow (as well as the dollars they stole). And the mantra of Re always going up is louder than ever… and so far it's the only way to make any money at all – and it's tax free!!! What else is a drug dealer to do??? Buy Canada Savings Bonds?


@rp: Why not keep rates low (to satisfy export economy requirements), but tighten up mortgage lending requirements (larger DP’s, reduce CMHC backstop, etc.)? Wouldn’t this help alleviate a housing bubble while protecting our weak dollar? That is exactly correct. The way to fight asset bubbles is to cut off the flow of capital into the asset (tighter margins in the case of stocks, larger down payments and tighter qualifications for houses). Don't cut off capital to businesses that provide long term jobs by raising rates across the board. And the answer to your question "why not?", it's because our "Conservative" government wants to keep the housing bubble going. Harper even said so himself on the radio a few days back – he cited rising house prices as a sign of a recovering economy. In fact the opposite is true –… Read more »


All I can say is that having a housing boom during a recession and anemic recovery is fishy. Something stinks.


i love this

rogers says "The idea you can solve a problem of too much debt and too much consumption with more consumption and more debt defies belief. I cannot believe that grownups would stand there and say that."

he goes on to say the only way to change is to let things collapse and rebuild

I agree. I'm afraid of the ramifications, but I agree.


@Ultraman: The banks as well as the major media outlets are already testing the waters around the subject. Not to mention Mark Carney has hinted a few times that he's fully aware of the problem. Not that an even greater amount of warning stopped the Bushies from throwing up their hands after 9/11 and saying "Who would have thought?" Well, Tom Clancey wrote a novel about it, a year earlier the US military did a large scale war-game on the subject of terrorists attacking a building with a plane. You had a briefing that you blew off titled, "Bin Ladin determined to strike inside the United States"… Hopefully the media isn't quite so complicit here. And I don't think Harper fishes so he can't claim that he blew off a meeting with Carney to go catch some fish. I just… Read more »


@Henry: "…Vancouver housing prise will keep rising for at least ten+ years…"

What will allow prices to keep rising in spite of increasing interest rates?

– Income gains?

– 'new' mortgage products (back to 40 year ams)?

– Increased densification (more basement suites etc.)?

– External wealth influx (ie rich )?

– Others?

I'm curious what assumptions are backing your strongly held view?

Starving Artist

Word is the Pacific Palisades hotel on Robson is converting to rental units after the Olympics. It used to be rentals before it was a hotel, but it's an interesting decision. With all the new hotels that have gone up recently, probably a good idea.


@Henry: Henry, if you are right we are witnessing a dramatic change in the way this market operates. For the past 100 years RE markets the world over have witnessed big crashes/adjustments, following fast appreciation. if you are right, then Vancouver is indeed different from London, NY, SF, LA and so forth. You must really think this place is special.


I strongly support the view that

– The interest rate will rise gradually to mormal rate (2~3%) within a five year period.

– Nothing will trigger a market crash in Vancouver in the near future.

– The same argument already repeated for at least over five years.

– Vancouver housing prise will keep rising for at least ten+ years.

– When market saturates, the rising speed will slow down. It is "slow down", but still rising…