The better things get for the economy, the harder it will be to afford a house.
So let’s add homebuyers and owners to the list of those who are worse off under an overhauled North American free-trade agreement. The proposed United States-Mexico-Canada Agreement (USMCA) removes the biggest concern of the moment about Canada’s economic future. A brighter growth outlook clears the way for higher interest rates, which will make it more expensive to buy a house or renew a mortgage.
Do not delay if you’re house-hunting or facing a renewal in the next few months – get a rate commitment on a mortgage today from your bank, credit union or mortgage broker. If you’re stuck on variable rather than fixed rate, go fixed if you want to skip the stress of rate increases ahead. We already saw a surge in the five-year Government of Canada bond yield on Monday to a seven-year high of 2.426 per cent. This puts direct pressure on five-year fixed-mortgage rates.
Interest rates began rising in 2017 and then paused for a variety of reasons that included concern about the economy being hurt by a NAFTA collapse. The resumption of rate increases sends a message that young buyers definitely need to hear: The housing market that made your parents rich on paper is done. Buy a home to live in, not to invest.
Immigration and restrictions on construction of residential real estate in urban areas are often mentioned as reasons why home prices in many cities took off after the financial crisis went nuclear just about 10 years ago. Low mortgage rates also get some credit, but not enough. Nothing comes close to low rates in explaining why people in some cities are so house-rich.
Falling rates in the past decade offset rising prices. The cost of housing increased, yet the cost of servicing the debt on a loan to buy a home remained affordable. That’s how the average price of a home in Canada went from $304,655 in 2008 to $510,179 last year, which works out to an excellent annualized gain of roughly 6 per cent. Gains were larger in several cities.
If you were a homeowner through this period, enjoy the glow. But don’t brag about it, okay? We have an impressionable new generation of buyers that has no hope in today’s world of making returns like that over the next decade.
Results of a recent survey by the real estate company RE/MAX suggest that just more than half of 18 to 24-year-olds in the Greater Toronto Area want to own a home in the next five years. Generation Z has the housing bug, alright. The cure is some straight talk on why house prices jumped in the past decade, and why that’s not going to happen again.
You can already see a cooling in the housing market in many, although not all, cities. The average price in August was $475,591, well below the average last year. Even a flat to modestly rising market will rewrite the housing narrative of the past decade. There will no longer be any point in jeopardizing your financial health to buy a house if houses don’t surge in value.
With the free-trade agreement salvaged, expect to hear about how the Canadian economy is becoming less dependent on low-interest rates to generate growth. There has already been speculation about an increase in the Bank of Canada’s benchmark overnight rate later this month. BMO Economics said on Monday that it was adding an additional rate increase to its outlook – in January.
The overnight rate guides the cost of variable-rate mortgages, which are generally cheaper than five-year fixed rates. Will variable-rate mortgages be a good choice if rates keep rising? If your future happiness depends on paying the least, then you should know that VR mortgages have generally been the lower-cost option for decades. Not since the 1980s have we had a sustained cycle of rate increases. If you’d rather skip the suspense to come about what rising rates will do to affordability, go with a fixed rate.
Something to remember about rising rates is that they’re not just costing owners and buyers more money. They’re also signalling the end to the greatest homebuying opportunity in a generation.
Rob Carrick