Notice how there’s been all sorts of bubble-talk in the national newspapers lately? Even the Americans have noticed our hyperactive market. Well you don’t have to worry about it anymore. In November the Canadian housing market saw prices fall and listings rise, signaling a return to normalcy.
While Peter Aceto welcomes a moderation in prices, the chief executive officer of ING Direct worries buyers are purchasing homes they won’t be able to afford when interest rates move higher. He has advised his employees to run clients through different scenarios to make sure they realize how much more their payments would be under historically average circumstances.
For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750. It’s a 34-per-cent increase, something many family budgets wouldn’t be able to accommodate.
“I understand how people get caught up in a hot market, but they are doing some odd things that really worry me,” he said. “You see multiple offers, and houses going for 20 per cent above asking. Those aren’t normal things, and the high level of confidence out there really does make me scratch my head a little.”
Mr. Aceto isn’t the only one scratching his head. Mark Carney is wondering if Canadian debtors will be able to handle rising interest rates. Carney is also telling Mr. Aceto and his banker buddies that they must be responsible when handing out taxpayer backed mortgage debt:
Similarly, lenders have responsibilities. Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit. As our simulations suggest, the overall credit profile of Canadian households could well shift if debt continues to grow at current rates. The Bank expects that Canada’s financial institutions will continue to apply their high standards of risk management, for which they are being justly lauded the world over.
So there you have it, everyone is aware of the risks and making sure all buyers are ready for interest rates to rise. So don’t worry you silly bears, everything is going to be all right alright. Mr. Carney hasn’t said when rates will rise or by how much, but here’s the BMO forecast:
A tip o’ the hat to Don for the links!