Mortgage advertising outside a Bank of Nova Scotia.Deborah Baic/The Globe and Mail
For the first time since Jason Pilon began selling houses two years ago, he's fielding questions from anxious clients about rising mortgage rates.
The Ottawa-based real estate agent has sold nearly 100 properties this year as historically low rates fuelled a buying frenzy in the city, with house-hunters rushing to take advantage of easy money. The same trend has played out across many parts of Canada over the past few months, but higher rates set this week by the country's biggest banks may soon cool a hot market - and do a favour for Bank of Canada Governor Mark Carney.
The central bank has said it expects to keep its key short-term lending rate locked at 0.25 per cent until mid-2010 to spur an economic recovery. Chartered banks, however, are finding their borrowing costs increasing for longer-term money, as investors bet that improving economic conditions will eventually bring more inflation.
By raising their mortgage rates and making it more expensive for customers to borrow money for a home, the banks are effectively throwing some cold water on residential real estate. That, in turn, might allow the Bank of Canada to keep its short-term rate unchanged as pledged.
"One could make the case that the Bank of Canada's stimulus is being whittled away by the banks," said Eric Lascelles, Toronto-Dominion Bank's chief economics and rates strategist. "The clear risk for housing is that the market is overheating, and that should make the central bank squeamish. But the banks may be slowing an area that quite frankly could use some slowing."
After Australia's central bank boosted its rate last week, speculation has mounted that the Bank of Canada could move rates higher sooner than promised if the economy continues a faster-than-anticipated recovery. But if the banks make borrowing more expensive, there could be less pressure for the Bank of Canada to do so.
"In this case, I bet the [central]bank is actually pleased with the development," Mr. Lascelles said. "Generally speaking, the cheap credit has put them in a bit of a pickle. If the banks subtly take things into their own hands and move rates higher and that leads to more manageable growth, I'm not sure that's such a negative outcome."
The five-year mortgage rate is important because it's the standard term chosen by those who want to lock in a rate rather than take a chance with cheaper, but more volatile, variable options. It's based on the Canadian government's five-year bond, the yield on which has risen this month about 0.3 percentage points, to 2.86 per cent.
While the higher mortgage rates will help banks protect their profits as their borrowing costs rise, it could also have consumers second-guessing whether they can afford the costs of home ownership.
But although rates are on the rise from April, when they hovered at 5.25 per cent, they are still far below the 7.25 per cent reached in 2000. (They were as high as 21.75 per cent in August, 1981.)
"Any degradation in affordability is going to have a dampening impact on housing-market growth," said Phil Soper, chief executive officer of Royal LePage Real Estate Services. "We've come through almost a decade where people could obtain mortgage financing for reasonable prices. Where rates will go is anyone's guess, but I would think people would assume they'd be going higher over time."
In the short term, that prospect could push a number of buyers off the fence and into the market.
"If you didn't buy at the beginning of the year, then you really missed out," said Mr. Pilon of Keller Williams Ottawa Realty. "There's no inventory left, and prices are heading higher as everyone scrambles to make a purchase before rates spike."