Category Archives: rates

Falling interest rates drive gains

From the ‘duh’ files: falling interest rates contribute to rising home prices.

A recent study points to yet another powerful, if-often-ignored, driver of home prices — falling interest rates.

Despite the recent, small interest-rate increase by the Bank of Canada, real mortgage interest rates have fallen precipitously since 2000. In 2000, typical mortgages were obtained at an interest rate of seven per cent. Last year, they averaged 2.7 per cent — almost two-thirds lower.

What has this meant for the purchasing power of Canadians?

Interest-rate declines reduce the amount that income borrowers must spend on interest payments, which gives them greater capacity to borrow with the same amount of income. Consider that the average Canadian family income was $50,785 in 2000 (including couples and singles). With mortgage rates at seven per cent, the maximum mortgage amount this family could secure was $180,949. At 2016 rates (2.7 per cent), the same family could borrow $276,610, an increase of 53 per cent.

Read the full article here.

We’re super-addicted to real estate fees

This is just kind of sad if it’s true, an analyst says that the associated fees for buying and selling real estate (commissions, taxes, legal costs and fees) make up a stunning 1.9% of GDP.

That’s more than agriculture, fishing, forestry and hunting combined.

Doyle points out that the U.S. was relying big time on home ownership transfer fees in 2005, when its real estate market peaked. But even then, those fees made up only about 1.5 per cent of U.S. GDP. Now, years after the U.S. housing market crash, transfer fees make up less than one per cent.

In Canada, upcoming data will likely show those fees have already started to fall, as the number of home sales across the country fell in June by the most in seven years.

Doyle says Canada’s increased reliance on real estate fees can be blamed on years of ultra-low interest rates, worsened during the oil price slump when the Bank of Canada cut rates even further.

“I think they felt that the lesser of two evils in that situation was to cut interest rates,” Doyle said.

But that fix has helped put Canada in another tricky situation, where the economy relies to an unusual extent on home transactions. That could have particularly negative consequences as the central bank begins to raise rates again.

“The drag on the economy that’s going to flow from [higher rates], I think, will prove to be much more severe than it’s been in the past,” Doyle said.

Read the full article here.

Rate hikes threaten the middle-class dream

In Canada ‘middle class’ currently seems to mean ‘deep in debt’ and rate hikes are a looming threat on the middle class :

For one view of Canada’s rate hike, consider the case of David and Neera. He can’t get a raise, is worried about retirement and they borrowed money a couple years ago to fix the roof. Interest costs will jump now, with vacations and kids’ clothes already out of reach.

Justin Trudeau’s entire economic agenda is aimed at David and Neera — we know, because he invented them. Their story anchored the Liberal government’s debut budget, tying together the impact of all the prime minister’s measures. Now they’re a cautionary tale.

“Canadian families are also taking on more debt to make ends meet,” the 2016 budget said. “For David and Neera, this debt is a constant source of worry.”

Read the full article over that the Financial Post.

OMG OSFI!

YVR pointed out this article by Rob Mclister about the OSFI B-20 bombshell:

The new OSFI’s stress test rules will make 20% of the mortgage market not qualify or they will have to reduce their mortgage by 18% to qualify. That is before recent and future mortgage rate increases are factored in.

Roughly 80% of new big bank lending in the richly valued Toronto and Vancouver markets is low-ratio mortgage lending

OSFI’s stress test, as proposed, would slash buying power for prime buyers by roughly 18%

For non-prime borrowers, qualifying rates would immediately rocket into the 6% to 7% range

Read the full article here.

Good time to be sitting on a $800k down payment

With interest rates going up there’s good news and bad news for housing. It can make it tough for people who are stretched thin financially, but might be good news for people waiting to buy:

The people who will benefit are those who have a nest egg and have been waiting for the right time to buy a home, he said.

“The real winner here is somebody sitting on a $800,000 down payment who says I’m going to wait for prices to fall.”

Overall, interest rates will continue to rise, added Brander. He predicts mortgage-lending rates could increase by several percentage points in the coming years. But as long as those increases are incremental, like Wednesday’s announcement, the economy will be able to absorb it, he said.

Seems like it’s always a good time to be sitting on an $800k down payment, but maybe we’re just optimists. Read the full article here.