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TD Sees 10% Price Drop and Says 40% Now in Variable Mortgages

falling-home-valuesAverage Canadian home prices will slide about 10% within two years, projects TD Economics.

TD says, “Toronto and Vancouver appear most at risk” and will disproportionately weigh down the national average.

The reasoning is all spelled out in this report. TD lists several potential home price killers, including “subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages, and fewer first time home buyers.”

The report also has a slew of mortgage-related findings. Here’s a sampling of those (italics ours):

  • 40% of current mortgage holders are now in a variable-rate mortgage, up from 24% in 2007.That’s clearly a notable shift. It’s occurring in part because people are becoming better educated about the mathematics supporting variables. If you’re considering a variable, confirm that you can comfortably handle payments at a 3% higher rate—even if you deem that increase a small probability. Currently, insured borrowers with less than 20% equity must show they can make payments at the qualifying rate (5.54% today). This is a “safety catch” that factors in a 3.39 percentage point rate increase. While that may seem conservative, debt ratio analysis based on the qualifying rate doesn’t always factor in peoples’ unreported and/or “lifestyle” expenses.
  • mortgage-interest-rate-forecastHere’s TD’s latest rate forecast for you variable mortgagors looking for a light in the dark. TD says: “We expect the tightening of monetary policy to now begin in January 2012. Gradual increases thereafter will take the overnight rate to 2.00% next year. After pausing to reassess the situation, the central bank is posed to further lift the rate to 3.00% by mid-2013.”It’s an understatement to say that this forecast is subject to change. But, if you assume these numbers are near the money, you’ll find that 5-year fixed and variable rates are neck and neck in terms of hypothetical interest cost over five years.
  • TD suggests that variable-rate payments will rise $110 per $100,000 of mortgage, based on its 200 bps rate hike projection.
  • “Interest rate hikes in conjunction with the amortization rule change will price out some buyers, particularly first-timers.”As a rough rule of thumb, for every one percentage point that rates go up, buying power for people with a mortgage (i.e., maximum mortgage amount) drops by about 9%. This applies to borrowers getting a high-ratio mortgage with an average debt level and average income.
  • About 1/3 of borrowers will be impacted by high-ratio amortizations being reduced from 35 years maximum to 30 years.
  • Regarding the prospects for drastic rate increases, TD says: “A disruption in employment in Canada due to an unanticipated global shock is probably a higher risk scenario than a spike in interest rates at this stage.”

TD’s Overnight Rate Forecast


TD’s 5-year Bond Yield Forecast


Rob McLister, CMT