A casual spectator of the Canadian housing market could be forgiven for feeling slightly overwhelmed in the last couple of weeks. It seems everybody has an opinion on the state of the housing market… unless you’re the leader of one of the country’s embattled political parties, who seem to be trying their best not to address the elephant in the room. Two weeks ago we saw fixed rates rise by at least 25 basis points for lenders across Canada. This was followed by IMF’s World Economic Output Report, the Bank of Canada’s Monetary Policy Report and a controversial and somewhat apocalyptic report on the housing market in The Globe and Mail. With the degree of information being crammed down our throats of late it can seem a daunting task to decipher these reports and that is why we, at Morcan Direct, have taken it on ourselves to relay what all this information means for you and your mortgage.
The IMF report projects a more positive outlook for the Canadian economy in the coming year with growth projections at 2.8%, up 0.5% from the January forecast. However the report warned that the BoC may have to act to increase interest rates in the near future as inflationary pressure from food and energy continue to put pressure on wages. This shouldn’t really surprise anybody as the general consensus, for quite some time, has been that BoC will eventually have to begin raising rates again after a sustained period of historically low interest rates. What might prove more worrying for those in the housing market was the report’s ominous warning of “the main domestic risk being the deterioration of housing markets and household balance sheets”. As we have previously noted on this blog, the consumer debt has seen an astronomical rise in recent years, while savings have sunken to below the levels of our US neighbours’ and this could well present considerable dangers for the economy should the housing market experience a sharp correction.
On April 12th, as expected the BoC left the benchmark interest rate untouched with many now citing the July 19th meeting as the date when Mark Carney will eventually put an end to this period of ultra low interest rates and begin to increase rates again. This means variable interest rates will remain low for the next few months but those entering into a variable rate mortgage should prepare themselves for increases before the end of the year. While the surge in the Loonie and the unwillingness/inability of the Fed to raise interest rates any time soon has left the BoC somewhat constrained, when deciding interest policy of late, it seems unlikely they can resist for much longer. While we realize the idea of a rising variable rate can seem like a scary prospect to our variable rate customers, we would like to assure them that it is unlikely that variable rate will rise to the level of fixed rates any time soon.
The fixed rate, as mentioned previously, has seen some upward pressure of late. The recent crisis in Japan, as well as the turmoil in the Middle East, had created an unforeseen anomaly in the bond market which pushed fixed rates down unexpectedly last month. Now, it seems, the market has absorbed these incidents and yields are rising. As confidence continues to creep back into the Canadian economy we should see these yields experience further upward pressure and fixed rates continue to rise. I say this with a couple of noteworthy caveats: the concern regarding EU debt has only heightened of late with Greece’s position looking increasingly ominous and Portugal joining the queue outside the European Central Bank’s door in search of a bailout. Should the increasing likelihood of one of the EU’s member’s defaulting on their loans come to fruition it would likely see fixed rates drop dramatically. Also the potential for a housing market correction in Canada would likely see bonds become a safe haven again and yields fall. If you wish to keep up with the fluctuations in the bond market we invite you to visit our new bond tracker.
And that brings us to our final topic, the possible existence of a housing bubble. A recent article in the Globe and Mail caused considerable consternation when the author suggested the existence of a housing bubble here in Canada. The article highlighted the rapid rise in house prices over the last decade in relation to both rent and income levels. Average house prices have doubled in the last ten years while rents have only had about a 30% increase and yet residential housing investment has gone through the roof. These are worrying signs. There can be little doubt that the housing market is due a correction, the only doubt is how severe a correction it will prove to be.
We advise our clients to remain prudent when entering the housing market and to ensure they have enough of a buffer for any potential increase in rates. It is important for our customers to note that despite the forecasted increases we still believe in the medium term the variable rate is where the real savings are. We will continue to monitor the situation and should we believe this rate is no longer advantageous, will keep you informed as when is best to lock in your rate. If you or anyone you know would like more detail on any of the information supplied here please feel free to contact one of our mortgage brokers. Never before has the advice of a mortgage broker been more valuable in this time of uncertainty.