Increasing mortgage rates appear to be fuelling home sales and curbing price growth.
Home sales rose 18.2% from last year according to the Canadian Real Estate Association (CREA). Sales in September were marginally higher than the long-term average for the month, indicating that the housing market has made an almost complete recovery from the slump engineered by Finance Minister Jim Flaherty when mortgage insurance regulations were tightened up once again in the summer of 2012.
Although the sales increase was only 0.8% from August, the growth beat economists’ expectations, and continued a seven consecutive month-to-month gain.
However, many pundits are declaring that the sales boost is temporary. Royal Bank economist Robert Hogue stated “[w]e expect home resales to stabilize near the current levels, although some modest pullback may occur later this year or early next as payback for sales that may have been advanced during the rush to lock-in lower rates.”
Marc Pinsonneault, economist for National Bank suggested that “[p]rice behavior seems to be at odds with the recent pickup in resale activity […] [i]t looks that households are willing to buy, but they are now bargaining harder on prices to compensate for higher mortgage rates.”
Consumers that are concerned as to how mortgage rates will change in the short-term should look to Washington. Canadian bond yields tend to parallel those in the U.S. as the securities are often viewed as substitutes for one another in the market.
In my opinion, the comparative sales percentages are misleading because they are evaluating growth against a period that experienced the immediate effects of tightening mortgage rules. The fact is that the current level of sales represents a more natural and accurate position, reflected by the upward correction. However, this does not mean that there is no truth that mortgage rates are fuelling home sales – it is probable that a percentage of home buyers were pre-approved at lower interest rates, and opted to ‘redeem’ their pre-approvals and enter the market with more discounted pricing. The most important factor for the housing market will be the state of the U.S. recovery. I believe that the United States economy is at a turning point, and despite the setback of the government shutdown saga of October, a stronger U.S. economy along with improvement in the Eurozone will force interest rates to rise domestically. This, combined with lackluster job creation will keep household income at a relatively consistent level, potentially resulting in a decelerating housing market. At that point, Financing Minster Jim Flaherty will be quite pleased with himself as he will have orchestrated a pricing decline in the housing market, although this will of course negatively impact Canadian net worth, and have no bearing on existing debt-to-income ratios.
Regardless, if you’re thinking about making a switch, purchasing a home, or refinancing your mortgage, contact your REALTOR® & Mortgage Broker, or feel free to give us a shout, and We’ll be happy to chat.
REALTOR® and Senior Private Loan Specialist - Residential & Commercial
Century 21 Desert Hills Realty and EQ Lending Corp.
Broker/Owner of EQ Lending Corp.