Housing affordability has taken a more restricted and expensive turn within 2016. From the now infamous CMHC mortgage rule changes to continued rises in home prices, an increase in mortgage rates could impact all people in the real estate market: homebuyers and homeowners.
Higher interest rates in Canada’s market remain inevitable and humble buyers to budget lower, but even owners who are refinancing or selling homes in downward markets (such as Calgary) will feel an aftershock.
Waiting until 2016 to make such drastic changes acts as an ineffective cure to both the market and its consumers. Cheap interest rates were hailed and prevailed in the market far before this year, yet 2016 supposedly marks the end of the party for customers seeking fair financing from lenders.
The question we need to ask is: Why now?
How the Canadian dollar impacts buying power and market success
Being that Canada’s dollar is lower now than it was in the 2008 recession, approximately eight years ago:
Currency Exchange Values
2008 vs. 2016
$0.94 = $1.06 $0.76 = $1.31
(CDN) (USD) (CDN) (USD)
Source: Canadian Forex
Imposing stricter home financing rules and interest rate increases would’ve better served the Bank of Canada, financial institutions and the CMHC in 2008, despite a fall in consumer employment numbers.
Despite the dollars being nearly at-par in 2008, housing was not nearly as affordable due to higher mortgage interest rates.
According to data provided by SuperBrokers.ca, in 2008 the average 5-year fixed prime rate peaked around 7.10% while today, it stands at 4.66%. This means that during and after the recession, mortgage interest rates also took a dip. With that dip, housing magically became more “affordable”.
How’d that happen?
In 2009, Canadian economists realized that Canada’s housing market wasn’t in as bad a shape compared to America’s market. Correcting rates to pre-recession levels then would’ve been unheard-of. However, it begs the question: with a higher dollar but lower employment, wouldn’t lending institutions have been better off enforcing stricter financing rules at that time(2009) instead of now?
If lenders attempt to raise current consumer interest rates by one percent, nearly one million Canadians would struggle to pay most bills – nonetheless a mortgage. Though the Bank of Canada issued a public statement in early September ensuring that low rates are here to stay, why does the Bank also insist on making qualifying for mortgages more difficult?
The downside of high(er) mortgage rates
Increasing mortgage rates will only allow homeowners with appreciated property to gain a benefit if they decide to sell. If a seller lives in a market where home sales are declining, higher mortgage rates may wind up discouraging buyers.
Refinancers also come at a special disadvantage since the lower rates they qualified for 5 to 10 years ago will no longer exist.
Toronto’s condo market can’t keep up its ballooning demand, Vancouver sales have fallen, and higher rates will make bidding wars more severe. Furthermore, young Canadian home buyers find saving for a 20% down payment now takes on average 102 weeks – nearly double the length of time from 2001.
Overall, higher interest rates demotivate every type of consumer. Possibly pursuing this in 2017 may not be a sound idea in a cooling market.
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