Tag Archives: low mortgage rate
Dan Richards – CTV
With only Montreal and Vancouver left to cheer for in the Stanley Cup playoffs, many luncheon conversations have returned to the topic of housing prices.
Recently, we’ve seen lots of headlines suggesting that house prices have run up to an unsustainable level and are due for a correction.
In mid March, The New York Times made a rare foray north of the border with a headline that read “Some See a Real Estate Bubble Forming in Canada.” A couple of weeks back, Gluskin Sheff star economist David Rosenberg released a report suggesting that Toronto and Vancouver housing prices could drop by 20%.
And one of the most e-mailed Globe articles last week was based on a ReMax report trumpeting the buoyant sales of luxury homes.
Focusing on affordability
Perhaps the most important determinant of short-term-price movements is affordability, the percentage of a typical household’s income required to carry a house. The two big variables that drive this number: house prices and mortgage rates.
The traditional rule of thumb for banks is that mortgage payments, property taxes and utilities shouldn’t exceed 32% of a household’s income, assuming a 25% down payment. The more of a household’s income required to carry a house, the lower the affordability.
As housing prices spiralled up in the 1980s, this guideline was relaxed – since 1985, the typical household would have devoted 39% of its income to carrying a detached, 1,200 square foot bungalow.
RBC economist Robert Hogue points out that there have been large swings in affordability over time and that different cities show different patterns.
In most cities, rising house prices meant that affordability was at its lowest in early 1990, when the typical household would have spent 53% of income to carry a bungalow. On the other end of the scale, Vancouver, always an outlier when it comes to real estate, hit its own high of 81% of household income to carry a bungalow in early 2008.
Once out of balance, there are only three ways for affordability to get back in line:
- Prices can stay flat as incomes increase over a period of years
- Mortgage rates can come down – unlikely in the next while
- Or housing prices can drop – something that happened after the all-time lows on affordability were hit in 1990
The impact of low mortgage rates
In the past eighteen months, governments around the world chopped interest rates to boost economies – and Canada was no exception.
As a result of low interest rates, carrying costs dropped and affordability improved. Even with strong housing prices, at the end of December the affordability level in most cities was close to its long-term average. The exception, again, was Vancouver – with the average bungalow taking up 69% of the typical family’s income, up from the historical average of 57%.
In a recent report, RBC estimated that in late December posted rates for a five year mortgage were 5.6%, 1.6 percentage points lower than normally expected given inflation expectations. Note that we’ve already seen mortgages rates begin moving up toward those higher levels, with more increases likely to come.
RBC estimates that if mortgages had been at their normal levels in December, the percentage of the typical Canadian household’s income to carry an average bungalow would have increased by four percentage points – although some cities would have been hit worse than others.
The affordability verdict
If mortgage rates in December had been at normal levels, the percentage of income to carry a house in most cities would have been well above its long-term average. The good news: In most cities those percentages would still have been well below their highs – prices may be a bit elevated but this doesn’t suggest a bubble or a big drop ahead.
The one city to worry about if you’re a homeowner is Vancouver, where normal mortgage rates would have resulted in the typical household spending 78% of its income to carry a bungalow, just shy of the peak level.
History shows that it’s impossible to accurately predict short-term movements of house prices – markets regularly overshoot rational levels both on the way up and the way down. What we can say is that based on current affordability, if house prices do continue to escalate, at some point they’re almost certain to correct back down.
That means there’s no rush to buy and time to wait for the right home at the right price – and that for the next while at least home buyers should evaluate houses as places to live rather than on their potential for appreciation.
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Rob Ferguson – Yourhome.ca
Like many homeowners, Sarbjit Kaur has been riding the knife edge of record low mortgage rates for well over a year, waiting for the right time to lock in as cheaply as possible for a longer term.
“I keep watching,” says the young mother and owner of Kaur Communications in Mississauga.
And for good reason. Experts warn rates are creeping up as bond markets react to concerns about high international debt levels and expectations the Bank of Canada will raise rates soon to quell inflation as the economy improves.
“The big question is where will mortgage rates be in five years and what could my payment be then?” says Kevin Moffatt, vice-president and mobile mortgage specialist with TD Canada Trust.
Another issue facing buyers is the new mortgage qualification rules designed by the federal government to cool the housing market and make home shoppers more realistic about what they can afford.
Taking effect Monday, April 19, the rules set tougher criteria for lenders assessing a borrower’s ability to carry loans insured by the Canada Mortgage and Housing Corporation, in cases where the down payment is below 20% of a home’s price.
The new standard is the ability to repay the five-year fixed mortgage rate, now posted at 5.85%, instead of the three-year rate, now at 4.35%, meaning many buyers will need higher incomes, larger down payments or have to opt for cheaper properties. As a rule of thumb, banks say mortgage payments shouldn’t exceed one-third of a family’s gross income.
“There are people who will not be able to buy a house,” says Pauline Aunger, president of the Ontario Real Estate Association. “If you were on the edge before, you’re below now.”
Amid concerns that low rates have encouraged Canadians to take on too much debt, Moffat has lost count of how many customers have been enjoying variable-rate mortgages around the tempting 2% mark.
“That just isn’t realistic long-term,” he says, urging both home owners and new home buyers to do some “what if” calculations to chart out how their mortgage payments could change depending on how high rates go.
“You have to be very careful,” adds Aunger, a real estate agent in Smiths Falls, near Ottawa.
As a single parent of two young girls, Kaur has one eye on her budget and the other on the mortgage scene. Rates for fixed terms of more than three years rose six-tenths of a%age point a couple of weeks ago.
At some point, perhaps this summer, she’s set to trade the advantages of her low variable rate mortgage for the peace of mind that comes with the lowest fixed rate she can get. It will be higher than she’s been paying, but she wants financial predictability.
“I would like to save money as long as I can,” says the former communications director for a Queen’s Park cabinet minister, noting falling interest rates have put an extra $200 in her pocket monthly.
Moffat says the hardest people to convince that historically low interest rates won’t be around forever are home buyers in their 20s or 30s, who’ve lived their adult years in a period of steadily declining and reasonable rates since the late 1990s.
“I tell young people today that my first mortgage, in 1988, was 11.5%. They almost fall over dead,” he quips. “I don’t think we’ll see rates like that, obviously, but the 6 to 8% range is possible one day.”
The difference in payments between a 2% rate and 6% is astounding.
For example, a $400,000 mortgage at 2% costs $391 weekly, rising to $485 weekly at 4% and $591 a week at 6%. Adding it all up, the difference between 2 and 6% is an extra $865 a month out of the household budget.
The message is, don’t buy more house than you can afford. And if it looks like higher rates could create a household financial crunch, try to pay as much down on the mortgage as possible before the renewal date to reduce borrowing costs. In the first years of a mortgage, most of the payments go to interest, not paying down the principal.
Experts note that over a 25-year amortization, the interest paid can easily equal the amount borrowed. On a $400,000 mortgage at 2%, total interest costs over 25 years are $108,141. But at 6%, that rises to $367,766.
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Tony Wong – Yourhome.ca
Jimmy Millis and his fiancée Nicoletta Bisoukis spent more than a year looking for their first home. During that time, the couple visited dozens of properties in a journey that many potential buyers in the Greater Toronto Area can relate to.
The first property they bid on last summer in Woodbridge was a four bedroom for $480,000. It ended up selling for $504,000.
The pattern would repeat itself six more times — with the couple on the losing end of the bid. But while the journey was ultimately worth it — they did finally land their dream home in King City — Millis says first-time buyers should beware of the pitfalls.
For one thing, the couple found themselves house-hunting during the most volatile market in decades. From one of the slowest markets in history at the beginning of last year, the pendulum has swung resoundingly back to a seller’s market.
“We thought we would be buying in one of the best buyer’s markets and we ended up being thrown into these crazy bidding wars,” says Bisoukis.
Analysts say record low mortgage rates and listings down by as much as 40% from a year ago have created upward pressure on prices, resulting in multiple offers for properties throughout the Greater Toronto Area.
“The sudden rally in Canada’s residential real estate market is surprising and troubling,” says Desjardins Bank in a recent economic study. “However, this is not a bubble yet.”
The upward swing in the market has caused worry for some economists, especially as affordability erodes.
“The keen buyer interest in Toronto has largely failed to attract more sellers, resulting in frequent bidding wars for available homes,” says Royal Bank of Canada senior economist Robert Hogue. “The resulting price increases have caused affordability to slip … suggesting that stress is starting to build in the Toronto market.”
Millis, an account manager for a large consumer food company, and Bisoukis, a brand manager for an alcoholic beverage distributor, had been scouring the market closely before deciding to start shopping for a home. They were both living at home, but fears of a bubble were one issue they had to deal with, which caused them to hesitate before plunging into the market.
“We kept thinking prices would come down, but it kept going up and, finally, we had to jump in with both feet. We were getting married this year and we had to get along with our lives,” says Millis.
After prices and sales dipped during the first six months of 2009, the young couple, both 30, thought it was a good time to buy. But the market made a surprising comeback in the second half, with prices ending up higher than they were the year before. The couple no longer found themselves in the driver’s seat.
As first-time buyers, they were competing with others looking for detached homes in the sought-after $400,000 to $500,000 range.
With the first property, they made the first-time buyer move of bidding lower than the asking price.
“We didn’t realize that it was deliberately underpriced to incite a bidding war. We didn’t think anybody actually paid the asking price for a house, much less more than list,” says Millis. “It put us completely out of the competition.”
Veteran agent Mike Donia says he has seen many first-time buyers — and even experienced buyers — bid for properties that are beyond their financial comfort zone as a result of multiple offer scenarios.
“Make sure after you buy the home that you can still have a life and you can still afford the family vacation when interest rates go back up,” he says. “It’s important that you buy on value, not emotion, and not get caught up in the froth.”
Some of Canada’s largest banks started to raise rates on fixed-rate mortgages last month, on expectations that the central bank will have to raise rates sooner, rather than later. Most analysts expect a total increase of up to 1% by the end of the year on the key overnight rate.
Comment: Except that our dollar is at par with the US dollar. Major rate hikes will push it to $1.10 US or more – which would be catastrophic for the export industry. Expect .25% and no more.
Although the spring market has been buoyant, analysts say it should get quieter in the second half of the year as a new Harmonized Sales Tax and higher interest rates kick in.
New mortgage regulations, which take effect April 19, will also help cool what some analysts believe is an overheated market.
And there is evidence of some pushback. Some buyers are now refusing to participate in bidding wars.
Nationally, the Canadian Real Estate Association’s most recent forecast calls for a 5.4% increase in housing prices this year, but then a 1.5% decrease next year.
So what does this mean for buyers?
If you can afford to wait, the market will likely be less hectic in the second half of this year. More listings and supply are also expected to come on the market, when move-up buyers return to the market as the economy improves.
“The temporary factors that have over-stimulated the housing market, including low interest rates and fears of rate increases, are starting to lose force,” says housing analyst Will Dunning. “I still expect a progressive slowdown of housing activity this year.”
For some segments of the market, such as condominiums, buyers can expect to have greater choice, as an estimated 35,000 units are in varying stages of completion.
“Highrise sales are higher than I think they should be,” warns Dunning. “A huge onslaught of completions will soon test the demand.”
Perhaps more importantly, don’t bite off more house than you can chew.
As cautious buyers and savers, Millis and Bisoukis decided to pay a healthy down payment of 30% of the price of their home.
They were also faced with the classic choice of choosing a smaller home on a larger property, or a bigger home on a smaller lot.
Millis says with the provincial greenbelt legislation and restrictions on building on the Oak Ridges Moraine, he opted for a home on a spacious quarter-acre lot.
On their seventh try, Millis says he got lucky. They bid more than half a million dollars on the property, beating out two other bidders.
Bisoukis was actually in New York when Millis made the bid. “He said we would lose it if we didn’t bid right away,” she recalls.
Returning from New York later in the week she had “about 20 minutes” after seeing the home for the first time to up their offer.
Their new home is a 1,900-square-foot, 40-year-old renovated bungalow that they moved into last month.
“It’s not a palace. But it’s our palace,” says Millis.
A house, after all, is more than shelter. Despite the stress of buying a home in turbulent times, Millis says the end result was worth it.
“The fun part in the search was doing this with Nicoletta. I am seriously a very lucky guy being able to share this dream home with the love of my life.”
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