Rates 101: How the expected BoC rate hike will affect your mortgage
With all eyes turned toward the Bank of Canada’s interest rate decision on Wednesday, some of Canada’s top housing minds analyzed what a potential rise in rates might mean for the nation’s hot housing markets. Here’s what they told BNN.
Needing a return to normal
Kevin Somers, COO, Royal LePage
“Since the onset of the Great Recession nearly a decade ago, Canada’s economy has been running on emergency power, provided mainly by low interest rates. The Bank of Canada’s indication of an imminent rate hike is a positive signal that the Canadian economy is in a place of stability and ready to withstand a slight interest rate increase.
We believe that the real estate market is best served by a healthy economy that requires a return to normal conditions. In addition, we feel that Canadian homeowners are prepared for the marginal increase in mortgage rates that an interest rate hike may bring. In fact, within the last two years, the proportion that households spent on mortgage principal payments exceeded that spent on mortgage interest payments for the first time since Statistics Canada began compiling its data in 1990.”
John Pasalis, president, Realosophy Realty Inc.
“Toronto’s real estate market is feeling the after effects of a housing bubble that peaked during the first quarter of this year.
In theory, the Bank of Canada raising interest rates by 25 basis points would have a dampening effect on the demand for homes – but I’m not convinced we’re going to see any immediate effects. If we look south of the border, the U.S. has seen three rate increases totaling 75 basis points since December 2016 and demand for homes still appears to be strong with the Case-Shiller 20-City Index up 5.7 per cent year over year in April.
The psychological effects of this rate increase might counterintuitively have a positive effect on the real estate market. If buyers believe interest rates will increase even further in the near future, some of those sitting on the sidelines watching the cooling market with uncertainty may get back into the hunt.
The big unknown is whether the fear of future interest rate hikes will outweigh fears about buying into a market that has seen prices trending down over the past three months. No one wants to buy now if they think prices will fall further.”
Spooking the flock
Rob McLister, Founder, RateSpy.com
“The Bank of Canada’s messaging and market probabilities suggest that by this time next year rates should be at least 50 to 75 basis points higher.
Vigorous job growth and GDP support a rate hike, as do household risks, albeit this last factor is not core to the Bank of Canada’s mandate.
Anemic wage growth, non-energy exports and lackluster inflation argue against hikes, but the latter is a lagging indicator and Governor Stephen Poloz suggests that inflation is bottoming.
The fact is, the Bank must act while it is partially blind. If it waits until it’s obvious the economy is overheating, it may need to hike too much later, raising the risk of recession.
Given the Bank’s tip-offs, its desire to maintain credibility, Canada’s economic buoyancy, housing risks and bond market probabilities, put your chips on a July 12 hike. If you’re wrong, double down for September 6 or October 25.
Quarter- or half-point higher rates are no threat to housing other than from a psychological perspective. Most borrowers could still get approved for a mortgage.
One-point higher rates would noticeably drive up real estate listings and further slow sales, especially if OSFI’s new stress test passes and takes more buyers out of the market.
Two-point higher rates would weigh down home prices and trigger a noticeable but contained bump up in defaults.
Three-point higher rates, while unlikely this decade, would lead to contagion selling and a further spike in mortgage arrears.
One surefire result of a hike will be that it spooks a large flock of floating rate borrowers into locking in. Unfortunately, many don’t realize that the bond market front-runs BoC policy actions, so they end up locking in too late.”
Kevin Somers, John Pasalis, and Rob McLister's comments were provided to BNN to preview this week's Bank of Canada interest rate decision. Check BNN.ca over the next two days for more commentary from Canada's top economists and rate-watchers.