Are you worried about the effects of rising mortgage rates? Apparently 48% of British Columbians surveyed say yes:
As concerns over the state of the Canadian real estate market abound, a new survey says nearly half of Canadians are unsure about their ability to afford their homes if rates rise by as little as two percentage points.
The survey commissioned by the Bank of Montreal study finds 43 per cent believe an interest hike would either hamper their ability to pay or leave them on unsure footing.
Regionally, residents of Alberta were the least concerned, with 73 per cent saying that rising rates would not affect their ability to afford their homes, while residents of British Columbia were the most concerned. Just 48 per cent B.C. residents are comfortable in their ability to handle higher rates.
Yet interest rates, after bouts of rising and falling, seem low and could remain low for some time to come. Is Canada living in a bistable rift, capable of maintaining high prices with low rates ad infinitum, or should we look to the experiences of the USA and Japan, countries where low rates have not lead to a reconstitution of house price appreciation, for more chilling portents?
Bank of Montreal Chief Executive Officer Bill Downe is saying there are ‘legitimate’ concerns about house prices being over inflated and coming down, particularly in Toronto and Vancouver. He is now calling for the fabled ‘soft landing’ to swoop in and fix the problem:
“We took a long, hard look at the Canadian housing market and concluded … there was a legitimate concern that house prices – particularly in the largest cities – had been rising at a rate that was simply unsustainable,” Mr. Downe said.
“With growing concerns over household debt, a soft landing in housing is in the best interests of our customers and the national economy.”
For those that are curious, yes this is the same BMO that kicked off a rate war with competitors over a special 2.99% mortgage deal. If you’re wondering why a bank would offer credit crack and then tell the addict they should cut back I think Patriotz puts it very clearly:
Because he runs a business and it’s his responsibility to the shareholders to make money. It’s either lend at 2.9% or give the mortgage business to someone else.
Banks like every other business have a responsibility to obey the law and that’s what they are doing. If you don’t like the parameters that the government has established, blame them not the banks.
This is why you’ve been hearing more call from the banks for the government to tighten lending standards. No single bank can cut out a huge percentage of the market just because they’re concerned about over-debt households. The banks can’t even get together and agree that they’ll adjust their lending standards themselves, because that would be collusion and illegal.
It’s all up to Flaherty now.
Wow, it seems like it was just a few days ago we were talking about newly introduced teaser-level mortgage rates offered by Canadian banks.
… oh, it was just a few days ago.
BMO kicked off the competition and TD, Scotia and CIBC jumped in with competing lowball offers.
Well it looks like Scotiabank blinked first. Their special offer didn’t even last a week. Canadian Mortgage Trends is reporting that Scotiabank has pulled their special offer for a 2.99% rate. Guess we’ll have to wait to see if the other banks will follow.
And speaking of mortgages, Canadian Mortgage Trends also has some interesting analysis of the OSFI recommendations for underwriting practices and how it’s about to lead to mortgages that are a bit tougher to get.
After reading through 18 pages of changes in detail, our immediate reaction was frankly, concern.
That’s not because the guidelines are greatly imprudent. Some are unnecessarily rigid, but most are sound policy.
It’s because OSFI risks tightening too much, too fast.
If you’re sharp-eyed you may have noticed some ‘special offers’ on 5 year fixed rates. BMO kicked off another low-rate war by once again offering a rock-bottom 5 year fixed rate of 2.99% and a new 10 year fixed at 3.99%.
Nobody wants to be left out of fun like that, so TD, CIBC and Scotiabank quickly followed suit and started offering a 2.99% rate as well.
How are customers responding?
Techar said reaction to BMO’s previous offer was fantastic. “We saw an increase in volume almost immediately and it continued for the whole two-week period.”
These deals are temporary and expire in a few weeks. You’d almost think something was about to happen March 29th, but who knows? Rumour has it more changes are coming to insured mortgage rules in Canada whether it’s higher down payment requirements or shorter amortization terms.
So is this a deal too good to refuse, or a trap for the gullible?
If rates start to rise, could it be a benefit to buy a home now? Would these ridiculously low rates offset a drop in prices at a higher interest rate?
What about in markets whose prices have fallen for the last few years? There are many of these across BC – The Okanagan has seen prices collapse by more than 30% so already.
And what does Mark Carney have to say about all of this?
“Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk,” Carney said Thursday as he held the bank’s trend-setting rate to 1 per cent.
Until renters can take out a mortgage to pay their rent they’re limited by income to how much they can pay. This is different than buying because mortgage rates and easy credit can change ‘affordability’ enabling people to take out larger loans and ‘afford’ higher prices.
Since rent tends to be more stable and directly related to the local income it puts a theoretical ‘floor’ on how far house prices can fall. As soon as it’s cheaper to buy than rent you should have investors who can do math buying up property.
Of course there are other complicating factors: psychology, ease of credit and liquidity.
Bloomberg has an interesting article looking at the situation in the USA after their housing bubble popped.
Many people who are technically homeowners are really renters. They put little if anything down. In many cases, the equity is negative when, for example, home-improvement loans piggybacked on first mortgages and brought total indebtedness to more than 100 percent of the house value. Many also planned to refinance their mortgages with cash-outs due to appreciation before their mortgage rates reset upward or, in some cases, even before they skipped enough monthly payments to be foreclosed.
It’s easy to be in a negative equity situation if you buy at the peak with very low down payment.
Of course it’s different in Canada right? The CMHC even introduced rules in 2008 eliminating zero down payment mortgages and now requires everyone to put down a huge 5% down payment..
So now we call it a ‘cash back mortgage’ and there are so so so many ways you can get a zero down mortgage in Canada today and be on your way to negative equity!