Variable mortgage rates would have to move substantially higher before they start to meaningfully drag on the housing market, experts say.
“Fixed rates have already moved up. But the variable rates, for sure, that's where the impact is,” Samantha Brookes, chief executive officer and founder of Mortgages of Canada, said in an interview.
Brookes said she thinks variable mortgage rates would have to rise to a range of 2.5 per cent to 3.5 per cent before it starts impacting homebuying activity.
On Wednesday, the Bank of Canada raised its overnight lending rate by 25 basis points to 0.50 per cent, marking the first time the central bank has tightened monetary policy since 2018. The benchmark rate is tied to most borrowing rates, including variable mortgages. Economists polled by Bloomberg expect the central bank to hike its rates five more times, bringing the benchmark rate to 1.75 per cent by the end of the year.
“Mortgage rates are a primary determinant of housing demand, along with employment, household formation and credit availability,” said Rob McLister, mortgage columnist at The Globe and Mail, via email.
The mortgage qualifying rate is also an important factor, he said.
As home prices skyrocketed in recent years, particularly in Canada’s major cities, homebuyers have taken on larger mortgages.
In 2017, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), and the Finance Department, introduced a mortgage stress test to safeguard against a potential shock to the housing market, since mortgages represent about 10 per cent of the country’s GDP, according to OSFI.
Currently, all homebuyers must prove they can handle mortgage payments at either 5.25 per cent or their contract rate plus two per cent – whichever is higher.
“Variable rates would have to rise 180+ [basis points] —i.e., from an average of 1.45 per cent (prime [minus] one per cent) today to over 3.25 per cent —for qualifying to be curtailed in a meaningful way,” McLister wrote. “And even then, desperate buyers could resort to non-prime lenders or those who don't use the federal stress test (i.e., certain credit unions).”
In reality, the vast majority of homebuyers have already had to stress test themselves against a fictitious mortgage rate of at least 5.25 per cent, which is why Mortgage Professionals Canada Chief Executive Officer Paul Taylor said the impact of rising rates on the housing market could be more psychological in nature.
“I think the psychological effect of increasing rates will have a greater impact than actual financial capacity. Consumers just haven’t seen five-year fixed rates above four per cent for a long time. That said, we know the recent purchasers have proven mathematically they are capable of qualifying for, and servicing, that rate,” he said by email.
He said he believes if fixed mortgage rates climb to 4.5 per cent or five per cent, it would be a “market mover,” adding that major banks such as Royal Bank currently have fixed rates above three per cent and “it isn’t affecting the market at all.”
'IF YOU CAN AFFORD IT, BUY IT'
Despite rising interest rates, Brookes said she still believes now is the time to buy a property.
“What I tell people is if you can afford it, buy it. That's it, just buy the house. If you can't afford it, don't buy the house. Because at the end of the day, if you look at it long term, real estate is still a great investment,” she said.
She said she thinks home prices could fall as the Bank of Canada continues on its interest rate hiking campaign, but that means mortgage rates will rise, potentially negating any savings a buyer might incur on the price of the property itself.
Longer term, she expects home prices to ultimately move higher.
Meanwhile, McLister said he isn’t overly concerned about a possible severe decline in home prices on the horizon, as long as rates don’t rise more than the market is currently pricing in.
“I wouldn't get overly worried about mortgage rates triggering a serious price correction unless they exceeded 150 or 200 [basis points]. This is by no means out of the question given three-decade highs in inflation, but it would likely take at least 18 months for rates to spike 200 [basis points],” he said.