Will Mortgage Rates Increase in 2015
Toronto Real Estate Market
The Toronto real estate market has been on a tear over the past 5 years. Since the financial crisis in 2008, GTA real estate prices are roughly 48% higher in September 2014 compared with 5 years ago. The average GTA price is now $574K vs. $388K in 2009 (according to TREB statistics). That is a significant appreciation, and far larger than historic norms. There are many factors that have been responsible for this, including increased population, Toronto’s new found attractiveness to foreigners as a place to invest, and of course, low interest & mortgage rates. That last factor has been helpful for home buyers, as it has allowed more to enter the market and buy a first home despite higher prices.
Mortgage Rates – For How Long Can They Stay Low?
While the prime rate was actually lower in September 2009 (2.25%) vs. today (3.00%), the 5 year posted rate was higher (5.45% in 2009 vs. 4.94% today). Keep in mind though that the period from 2009 to 2014 has seen rates that are much lower than previous years. As an example, in 2000, the posted rate went as high as 8.45%, while prime was as high as 6%. The key point now is when will these historically low interest rates start to finally go up?
The US Economic Point of View
It probably comes as no surprise to learn that Canadian interest rates are very much influenced by what happens with our big southern neighbour. All eyes have been on the US Federal Reserve Bank lately, and all current expectations are that they will increase their short term interest rates sometime in either March or June of 2015. This timing may change, depending on prevailing economic at the time, but on current forecasts, they will raise rates next year. This is because US economic data for 2014 has been positive, especially compared to other large economic areas (e.g Euro zone or Japan). So what does that mean for Canada? Will our rates go up too?
The Canadian Economic Point of View
Bank of Canada interest rate policy has historically shadowed the US Federal Reserve’s, so it would be reasonable to expect our interest rates to rise when the US increases their rates. However, the Deputy Governor of the Bank of Canada, Timothy Lane, has recently stated that Canadian monetary policy may diverge from its big brother. He also stated that Canadian policy will first and foremost be dependent on the state of the Canadian economy. This seems to give the Bank some room to maneuver, and may suggest a delay interest rate increases here. Current weak Canadian economic data ($610m trade deficit in August, lower commodity prices due to strength in US $ etc.), seems to suggest that rate increases north of the border may be delayed compared to the US.
The Impact on the Canadian Housing Market
As mentioned at the start, low interest rates have played a big part in keeping housing affordable for a lot of Canadians, even in the wake of double digit annual gains in house prices. So interest rate movements are a critical component of the health of our housing market. The latest data suggests Canada’s economic recovery is lagging the US, which could mean that Canadian interest rates remain lower for longer. This will continue to have a positive effect on housing affordability for many Canadians, at least in the next 6 months.
Ram Rajendram is a Toronto Real Estate Broker with Century 21 Harves Realty Ltd., Brokerage. He sells condos & houses throughout the GTA & assists home & condo buyers with their purchasing needs. He is also a Canadian Chartered Accountant (CA) & holds a Bachelors Degree in Economics from the London School of Economics (LSE)