Rate hikes not seen triggering housing price collapse
“The effect will be marginal but there will be an effect,” said Don Lawby, president of Century 21 Canada. “Though, if anyone is waiting for a tremendous drop in prices in the Canadian market, I don’t think it’s going to happen.”
The Bank of Canada pushed up mortgage rates by a quarter of a point for the second time in two months on Tuesday, yet gave little indication as to its future intentions. The bank said the global economic picture remains unclear and future rate decisions will depend on conditions at the time.
Economists are expecting at least one, maybe two more rate rises this year before the bank takes a breather to assess the impact on the economy.
The housing market is already showing signs of a marked slowdown with sales through the multiple listing service dropping 8.2% in June from the previous month. Activity declined in 70% of regional markets.
"The biggest message is that consumers should not misinterpret what is essentially a normal summer slowdown," said Vancouver-based mortgage broker, Peter Kinch. "We still have a very fragile consumer psyche and they are nervous, when the truth is the Canadian economy is strong."
Kinch said the rate hikes, combined with the HST and consumer caution may mean a summer cooling of 3% to 4% may translate into a drop of between 5% and 6%. Though he said he expects the market to recoup those losses by next spring.
Mortgage advisers also say prospective buyers and homeowners should think carefully before rushing to fix home loan costs. According to research from BMO Capital Markets, over a 30-year time span variable-rate mortgages have been more cost effective for consumers for 82% of the time.
A 25 basis point hike from 2.5% to 2.75% on a $340,000 mortgage will only mean an additional payment of about $46 a month, BMO Financial Group’s Director of Mortgages Laura Parsons said.
With rates only expected to rise slowly over the coming years, it doesn’t necessarily make financial sense to pay about 5.79% on a five-year fixed-rate mortgage when banks’ prime rates are close to an overnight rate of 2.75%.
“When (the variable rate) is not the best way is if you cannot sleep at night or are on a very strict budget,” she said.
If the Bank of Canada were to hike its prime rate by a full percentage point over the next year, borrowers with a $250,000 mortgage with a 25-year amortization would save $17,478 over five years by going with a variable rate, compared to a five-year fixed rate, according to figures from Mortgage Intelligence.
Brokers recommend wherever possible than homeowners opt to increase their monthly payments to adjust their budgets to future rate increases and in the meantime speed up the payment of principal.