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.
RSS 2.0 comments feed. leave a response, or trackback from your own site.
December 11th, 2009 at 9:34 am
@pricedoutfornow:
“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%.
December 10th, 2009 at 10:39 pm
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.
December 10th, 2009 at 9:44 pm
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
December 10th, 2009 at 9:26 pm
Regarding @Henry: You may strongly support the view but the view is not strongly supported.
December 10th, 2009 at 9:23 pm
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.
Friday Free-for-all! | Vancouver Condo Info Says:
December 10th, 2009 at 9:10 pm
[...] -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 [...]
December 10th, 2009 at 7:39 pm
as a taxpayer, I say yes please to such limitations.
December 10th, 2009 at 7:13 pm
@domus:
“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!
December 10th, 2009 at 6:40 pm
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.
December 10th, 2009 at 6:16 pm
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
December 10th, 2009 at 6:04 pm
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.
December 10th, 2009 at 5:09 pm
This is interesting, do you guys know anything about it?
http://tinyurl.com/yjrvwb9
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 and realtors) is suggesting to retain the CMHC?
Could it be that this government is finally realizing the disastrous consequences of having CMHC as a guarantor of zero-down mortgages? I doubt it, based on Harper’s interview of only one week ago (he said that housing is booming, ergo the economy is in good shape).
Yet, it would be a great thing if the CMHC were to be reduced in scope.
December 10th, 2009 at 5:06 pm
“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.
December 10th, 2009 at 5:00 pm
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…
December 10th, 2009 at 4:12 pm
@Anonymous: All the more reason it is fishy. It is too good to be true.
December 10th, 2009 at 3:40 pm
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.
December 10th, 2009 at 3:22 pm
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?
December 10th, 2009 at 3:20 pm
@rp:
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 – like all bubbles, RE bubbles result in malinvestment and excessive debt. That Harper was supposedly educated as an economist makes it even more absurd. As least Trudeau had an excuse for his fiscal incompetence.
December 10th, 2009 at 2:32 pm
All I can say is that having a housing boom during a recession and anemic recovery is fishy. Something stinks.
December 10th, 2009 at 2:29 pm
http://finance.yahoo.com/tech-.....ry-America‘s-Problems-%22Getting-Worse-Not-Better%22-Jim-Rogers-Says?tickers=SKF,XLF,FAS,FAZ,%5EDJI,%5EGSPC,UUP&sec=topStories&pos=9&asset=&ccode=
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.
December 10th, 2009 at 2:21 pm
@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 hope Iggy and Co. can press the advantage when they’ve got it, the Liberals have been too divided lately to really stick to a message.
December 10th, 2009 at 1:56 pm
@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?
December 10th, 2009 at 1:38 pm
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.
December 10th, 2009 at 1:29 pm
@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.
December 10th, 2009 at 1:15 pm
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…
December 10th, 2009 at 1:10 pm
#14 @Purp: Yes, we could keep rates low and reign in loose lending. That would be prudent. But maybe you missed the part where the government weakened capital requirements, removed caps, extended amortizations, and ordered the CMHC to make more risky loans? It’s full bubble all the way.
December 10th, 2009 at 12:49 pm
From my narrow point of view as a lender for a large CU, I tell you this is a disaster in the making.
I don’t know what the trigger will be, and everybody from by manager to the Prime Minister and all the MSM in between will say the same thing, we could have not see “THIS” or “THAT” coming but it will be of devastating proportion.
December 10th, 2009 at 12:25 pm
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?
December 10th, 2009 at 12:24 pm
@casanova: Your scenario seems very plausible to me. On the demand side, I think borrowing from future demand and continuing inflated prices will get us to the dropping point soon enough. On the supply side, the low interest rates are bringing out more developments and shadow inventory is just lurking to be unleashed.
December 10th, 2009 at 12:06 pm
@domus: This is a joke! Why are interest rates so low then? Why not push them up now?
I’m really not an economist but I think the answer is that rising rates would strengthen our dollar. Being a net export nation that’s bad for our economy – presumably the BOC thinks that at this time it’s worse than a debt bubble.
December 10th, 2009 at 11:34 am
@rp:
“- exploding deficit & debt drives up interest rates”
And taxes. On top of that, taxes already have to start going up to support the lazy boomers who never paid their share during their working lives and will rely on US to pay their shares now.
December 10th, 2009 at 11:05 am
Am I the only one who thinks the government has created a “death machine” ?
- rising interest rates push more people into foreclosure
- losses accrue in CMHC’s $600B portfolio, which is leveraged 75:1
- CMHC bailout clobbers the Federal Government’s balance sheet
- exploding deficit & debt drives up interest rates
This could be fun!
December 10th, 2009 at 10:44 am
One has to wonder why CD Howe hasn’t come out with a scathing report on CMHC. If the Liberals or NDP were behind the fiasco you can be sure they would have been all over it. I wrote them a while ago and they never did anything. I’m actually dissapointed they or W5 have been so quiet. If anyone has contacts please get it in front of them.
December 10th, 2009 at 10:37 am
when all economist agree that interest rates are going to rise it is a sure sign that they wont. I am sure we are in a mild deflationary enviroment like Japan and low interest rates are here to stay for a very long time minimum 5 years. It may sound crazy but dont count on interest rates going up anytime soon. Regarding real estate, I think eventually we will have brought up all forward demand and everyone who wanted a house will have one and then the market will drop, because of lack of greater fools. Interested rates are low in the states now, never been lower, why there is no bidding wars there like here in canada?
December 10th, 2009 at 9:58 am
I don’t believe that an uptick in interest rates will directly create a crash. It could be one of the things that slowly squeezes the bubble psychology. If fear of missing out on the gold rush flips into fear of a leveraged loss then we may have a crash. I don’t think interest rates alone will do that, it could be part of the narrative but I don’t see it as the only pin that’s going to pop the bubble.
December 10th, 2009 at 9:24 am
My favorite bit of Carney’s speech:
Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.
Why would bank care about uncollateralized debt? The fat of the game is in mortgages, and they come risk-free thanks to CMHC!
Let the free credit roll, these are good time my friends!
December 10th, 2009 at 9:06 am
I think psychologically the situation is very similar to drug addiction. It gives near term gratification for all involved and no one wants to take the bitter medicine, with the consequence that there will be real withdrawal pains later – or worst, no recovery will happen and we all become long term junkies. Bond vigilantes will come in and then take it all away.
December 10th, 2009 at 8:54 am
@mino3: Sad to day, but I look forward to hearing the sob stories. At some point someone has to be held accountable for this social disaster.
December 10th, 2009 at 8:53 am
The drug dealer counseling the addict:
http://tinyurl.com/yfnjck8
Central bank warns on rising debt
The Bank of Canada warned Thursday that growing household debt is now the biggest risk to the country’s financial system, and repeated a plea for borrowers and lenders to remember that the current era of super-low interest rates won’t last.
This is a joke! Why are interest rates so low then? Why not push them up now?
I’ll make the nooze for you to hang yourself, but you shouldn’t use it…
December 10th, 2009 at 8:48 am
This is exactly what I’ve been saying ever since BOC crashed interest rates to zero. Everyone buying recently in Canada essentially has a teaser rate, exactly how borrowers had one in the US up until a few years ago. Of course you can afford a mortgage when money is basically free, but what about when it isn’t?
When the shit hits the fan, you’ll hear all these sob stories about people not being able to afford their new payments… just like what happened down south.
The only difference is because people can only afford mortgages on a variable rate anymore, the ‘resets’ will be more gradual and not so violent as it was down south. The result will ultimately be the same: can’t afford the new payments.
Boohoo.
December 10th, 2009 at 8:47 am
http://now.eloqua.com/es.asp?s.....5c8f32666d
For now, a similar chain of events seems unlikely. Dubai’s debt levels are far too small to cause a systemic collapse. Countries that are part of the European Union (EU) such as Ireland, Portugal, Spain, Greece and Italy have wealthy neighbours that have much to lose and can provide support in the event of a fiscal collapse. The EU also reserves the capability to kick countries out on their own in the event that finances become unsustainable. The United States has the ability to tax its own citizens and the rest of the world via currency devaluation if it so chooses. Government debt levels remain low in much of Latin America and Asia and credit markets have very limited exposure to African countries.
However, some degree of fear is justified. The primary threat engendered by a sovereign default somewhere in the world this year is the possibility that investors will rethink their approaches to yield and risk. Government debt loads are much larger than at any previous time in history and more debt must be added and rolled over in the next few years. In the event that markets collectively begin to demand higher premiums for investing in these instruments (which seems increasingly likely), interest rates will rise. A rise in interest rates increases the risk that more countries default and leads to further yield increases. Ultimately, this process sucks money out of equity markets and the general economy.