Home sales
around over Canadian MLS System fell by 3.9% between August and September 2022,
marketing a slight re-acceleration in the sales slowdown that began with the
Bank of Canada’s first-rate hike back in March.
Why is that?
Well for one thing, up until recently, higher borrowing costs had been
disproportionally affecting the fixed-rate space, with home buyers still able
to qualify more easily if they went with a variable rate mortgage and they did.
The Bank of
Canada’s recent rate hike in early September slammed that door closed, so it
wasn’t a big surprise to see some additional softness on the sales side.
The Bank of
Canada is not done yet.
Odds were
for a 50-basis point hike in late October. Bets are now for a 75-basis point
hike at that meeting. The “terminal rate” as it’s called, meaning where they’re
expected to stop, has gone from 3.5% (they’re at 3.25% now) on the overnight
rate back in the spring to closer to 4.5% now.
Not only
have many seen mortgage payments rise dramatically as the Bank of Canada has
raised rates, it has gone so far that we’re now hearing stories about people
with closed variable rate mortgage hitting what are called “trigger rates”. In
this scenario, the principal repayment component has effectively fallen to zero,
with amortizations rising, and still payment is going up.
Additionally,
those with fixed rate mortgages are not safe for the next five years. Those
come up for renewal every day. People paying attention are rightfully worried.
People who have not been paying attention could be in for some serious sticker
shock.
While these
mortgage trends warrant our close attention going forward, long-term I remain
very bullish on housing. Canada’s population added more than 700,000 people in
the latest annual figures from Statistic Canada. More than 500,000 people turn
30 every year. These people need to live somewhere.
As such,
with rapidly rising rates, the “too much” housing demand story is like to move
into the rental market for a time.
And so, in
that sense, this is a continuation of the same story- those who got into the market
early are unlikely to be affected by rapidly rising rates and are also unlikely
to se the value of their properties decline all that much from the peak.
Meanwhile,
those that bought recently at elevated prices, and those in the rental market,
may be in for a tougher ride over the next few years.
This story
is already well underway. What happens next depends on what inflation does
going forward.
SOURCE BY:
CREA