Measures to combat the financial damage from the novel coronavirus pandemic have provided homeowners with some unintended benefits: cheaper money and a higher net worth at a time of great economic uncertainty.
Ultralow interest rates have sent mortgage rates to record lows and helped inflate home prices to record highs, increasing household wealth substantially for homeowners with secure jobs. Renters, meanwhile, have not reaped the same rewards – some are lower wage earners or have lost work in recent months and been forced to rely on temporary government financial aid.
“Low mortgage rates are very enticing and a huge incentive to buy a new property or renovate an existing one. All the while, the value of that property is going up faster than inflation,” said Carl Gomez, an independent real estate economist.
“It’s hard to say the same thing about renters right now. They typically have a lower net worth and lower incomes than homeowners to begin with,” he said.
After the Bank of Canada slashed its benchmark interest rate to 0.25 per cent in March, mortgage rates sank. The popular five-year fixed rate loan is now less than 2 per cent. That has made it easier for homeowners to pay down their mortgages and enticed early renewals. Mortgage brokers have reported a surge in refinancings and new purchases.
“When you cut interest rates to the floor, with that action alone, you are benefiting homeowners over renters,” said economist David Rosenberg, president of his own eponymous research company.
“Homeowners made out like bandits in the last 10 years, insofar [as] they managed to build up significant equity in their home through this dramatic price appreciation,” he said. “There is no doubt that homeowners benefited immensely relative to renters.”
Douglas Porter, chief economist with Bank of Montreal, said the benefits are a side effect of the central bank’s policies to help the economy and foster a recovery.
“Those with a lot of assets will benefit in that kind of environment. That is the side effect of easy monetary policy, not the primary goal,” he said. “Not sure what the alternative would be. It would be misguided to raise interest rates.”
After a brief lull in March and April, Canada’s property market reached new heights with record sales and record prices in July. The national home price index, an industry calculation of the price of a typical home sold, rose 3.3 per cent to $637,600 from January to July on a seasonally adjusted basis, according to data from the Canadian Real Estate Association.
In Montreal, the index was up 7.7 per cent to $401,200. In Ottawa, it jumped 9.4 per cent to $502,500. In the Toronto region, it increased 4 per cent to $876,100 and in the Vancouver area, which had been recovering from stricter mortgage rules and higher taxes, the price rose slightly to $1,023,100.
Cottage country, suburbs and smaller cities are also making big gains. West of Toronto, Hamilton-Burlington’s home price index climbed 7.8 per cent to $683,700. North of the city, the index in the Barrie area rose 6.8 per cent to $524,100.
In addition to seeing their major asset increase in value, homeowners are also finding it easier to pay down their loans. With lower mortgage rates, borrowers spend more of their monthly payments on principal instead of interest.
For example, when the five-year fixed rate was 2.99 per cent last year, for a $500,000 mortgage amortized over 30 years, the borrower would make monthly payments of about $2,100 in the first year. Of that amount, $1,240 is interest and $860 is principal debt, according to mortgage broker Elan Weintraub with Mortgageoutlet.ca.
For the same mortgage with today’s 1.99-per-cent mortgage rate, the borrower makes monthly payments of $1,845 in the first year. Of that amount, $825 is interest and $1,020 is repaid to principal, Mr. Weintraub said.
For renters with secure jobs, the situation is not dire – in tight markets such as Toronto, supply is up and demand is down. A slew of new apartments and condos are coming on the market in and around the city. As well, some Airbnb operators turned their properties into long-term rentals when tourism vanished after borders closed.
Meanwhile, demand for rental units has decreased as immigration slows because of border restrictions and fewer people moving because of the economic turmoil. In the city of Toronto, average condo rents fell 6 per cent in the second quarter over the same period last year, according to industry group Urbanation.
But even the slight drop in rent does not outweigh the homeowner advantage – at least not yet.
“Over all, when it comes to housing, it makes the situation less equal as the impact of low rates will outweigh the impact of disinflation in rent,” said Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce. “When it comes to rent, supply of rental units will slow down, which will limit the break on rent.”
Throughout the pandemic, poorer households have been hit harder than higher wage earners. Individuals who earned less than $20 an hour accounted for 76 per cent of the job losses from February through July, according to data from Statistics Canada. Over the same period, the number of jobs increased for people who earned at least $30 an hour.
Pandemic measures are helping some household balance sheets in other ways. Before March, Canadians were using increasing shares of their disposable income to pay interest on their debts, and insolvencies were rising.
The pandemic has temporarily reversed that trend. The debt service ratio - the portion of household disposable income allocated to debt – is expected to ease because of lower interest rates. Canadians paid down their credit card balances and lines of credit from the end of January to end of July, helped in part by loan deferral programs and government aid.
But the country’s total household debt levels are nevertheless greater than gross domestic product, with mortgages accounting for majority of the debt.
The Canada Mortgage and Housing Corp. has predicted home prices could fall as much as 18 per cent and has warned of trouble ahead when mortgage deferrals are due to expire in the fall. Banks have provided deferrals for about 16 per cent of their residential loan book.
“Canadians have never been more exposed to residential real estate as they are today,” said Mr. Rosenberg, who calls the country’s residential property market an “ongoing” bubble.
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