Rates Drive Home Sales

Canadian-Mortgage-Rates-Drive-Home-Sales CREA says home prices are up an average of 11.3% nationwide versus last year. Given the recession we just went through, that’s nothing short of stunning.

Economists say cheap mortgage rates are the main factor.

“I think [low mortgage rates are] having the effect of putting people into homes at an earlier stage than would have otherwise been the case,” Scotia economist, Derek Holt, told the Globe.

Buoyant consumer confidence is also playing a role.  Yet, as CIBC economist, Ben Tal, believes, employment is more important than consumer confidence.

“If I don’t have confidence that I will have my job tomorrow, you can offer me a 0% mortgage and I will not take it,” he says. “If you know your job will be there, you jump on it. That’s what’s happening. People know this will not last forever.”

But Holt warns:  “I do worry, longer term, not even that far out–two or three years from now–once short and long interest rates are probably higher…whether a lot of those mortgages will be as easy to carry as they are right now…”

“The kind of strength we’ve seen of late isn’t necessarily sustainable.”

(Globe Article)

  1. But Holt warns: “I do worry, longer term, not even that far out–two or three years from now–once short and long interest rates are probably higher…whether a lot of those mortgages will be as easy to carry as they are right now…”
    Probably true, but by that time people will have payed off so much principle, that refinancing at a higher rate shouldn’t be too terrible (assuming they were not overextending themselves to begin with).

  2. Hi Bob,
    Thanks for the note. You’re probably right that it won’t be a major issue for most–depending how high rates jump.
    The interesting questions is, how many people are, in fact, overextending themselves today. I’m guessing the number is relatively small because lenders have tightened up a lot in the last few years.
    From a numbers standpoint, if fixed rates go from 4% to 7% in 5 years, a $300K 35-year mortgage payment will jump from $1322 to $1756 at renewal.
    Most people buying a $300K house should be able to afford $434 more a month. Most likely their income will go up in 5 years as well.
    Cheers,
    Rob

  3. People are moving into the market now, rather than in a couple of years, because of the easier carrying costs.
    So what will happen to demand in a couple of years when the 2010-2012 market not only doesn’t have those extra buyers, but in fact has fewer because the “would have been 2010-2012 buyer” bought in 2009?

  4. I think interest rates have something to do with it but in Toronto inventory is the major reason prices have risen. Inventory is very low right now and it is driving prices up. The low interest rates keep the people in the market looking but the lack of homes for sale is forcing consumers to pay more and make quick decisions.

  5. Homeowner,
    # of sales is at an all time high. That is the demand side, not the supply side.
    With respect to the supply side, anyone who had a prime minus mortgage (ie variable, from before last fall) is now paying below 2%. That is quite a disincentive to sell. With 30% of mortages at variable, that reduces a lot of supply.
    Add the two together, and you get

  6. LOL, What is the average income in Toronto and What is the average home sold in Toronto? two and two don’t seem right.

  7. My post got truncated.
    Meant to say “Add the two together and you get… the market of the past several months. What happens with these interest rate fueled distortions to the supply and demand side end?. It isn’t just about present buyers being able to afford their mortgage in a few years. It is also about the supply and demand interaction in the marketplace, and sales volumes and prices.”

  8. “Most people buying a $300K house should be able to afford $434 more a month. Most likely their income will go up in 5 years as well.”
    Don’t forget that interest rates only have one way to go, more taxes in the future due to the deficit spending, higher energy costs, higher personal spending taxes (HST) and that person income growth has been pretty much stagnant for a long while and you’ll have a great picture of the future.
    Don’t forget if these first time home buyers have kids within the next 5 years, there will be high day care costs too due to cutting of social programs by the Ontario government.

  9. Hi Bob,
    No argument that rates will go up. Just not sure how much or how long.
    I can say anecdotally that we see hundreds of applications a year and it’s uncommon for someone’s budget (on paper) to be so tight that they couldn’t afford a 3% rate increase. Of course, if rates get crazy then that’s a different story.
    Cheers,
    Rob

  10. Often, their lifestyle expenses goes up too relative to their income. My experience is renewal affordablity issues may arise if a family experiences long term job loss, change in family incomes due to supporting child/aging parents or divorce and not rate increases resulting in additional $400mo. payments. Then again, we haven’t seen significant mortgage rates increases coupled with stagnant house prices in many years so its difficult to predict the overall impacts.

  11. It seems that we are all nervous about how the future will impact the consumers’ ability to re-finance or purchase a new home after the artificial rates return to market values. What steps can we take today to advise our clients and minimize the risks.

  12. Heather,
    The big problem is not interest rates it’s taxes! Over the last three years has your property taxes gone up by more than 2% every year? If yes expect more of the same. As governments go debter in debt, someone has to pay for it. This could be less services more user fees, HST, toll roads, health tax, etc. Right now the average Canadian works to June 6th to pay for all levels of taxes!
    Will rates go up yes, when who knows. The interest rates going up is like asking if it’s going to rain when you have a tsunami of tax increases hitting the shores in a few hours!
    Since you are in Alberta, taxes are not as bad as in other provinces. A good start is see how good (or bad) the city manages their finances/taxes over time, this I believe will drive sales, to the good, in the future (lower taxes).

  13. Hi Banker:
    You’re absolutely right in that there are countless factors that impact long-term affordability. Many of them cannot be foreseen ahead of time.
    These factors have always been there throughout time. Fortunately, Canadians have a long track record of successfully dealing with these unknowns, even during major rate spikes–like in the late 80’s and 90’s.
    If one manages his/her finances well, can handle a 3-4% rate increase, and doesn’t have significant financial risk factors, the future of rates and housing prices should not be a debilitating concern over the next five years.
    Hi Heather:
    Most professional mortgage planners make recommendations based on client interviews, rate simulations, credit analysis, and budgetary reviews. As Banker implies above, it’s also key to plan for contingencies. For example, if someone doesn’t have a 3-6 month emergency expense buffer saved up, their leverage level should not be the same as someone who’s more financially stable.
    Cheers,
    Rob

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