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.