Category: National Real Estate News

This article appeared in The Globe and Mail on January 30th, 2015 and was written by Tamsin McMahon.

Canada’s housing market is already seeing the impact of falling interest rates, with nearly half of Canadians telling a new survey that they are planning to buy a home in the next five years and more than 15 per cent saying cheaper mortgage rates will allow them to make the purchase sooner than expected.

Younger Canadians, who are struggling with far more debt than their parents did at the same age, are the most likely to respond to falling rates. More than a fifth of millennials told a Bank of Montreal home buyers survey that they have shortened their time-frame for buying a home because of lower rates and 75 per cent said they were planning on making a purchase within the next five years.

Regionally, the demand among buyers is strongest in Ontario and Atlantic Canada, where the combination of low interest rates and cheaper oil prices are poised to put more money in the pockets of consumers. Nearly a fifth of residents told pollsters that they would speed up their home purchase because of low interest rates.

In contrast, just 13 per cent of residents in Quebec and 12 per cent in Alberta said lower rates were having an impact on their buying decisions. Plunging oil prices have made Alberta consumers more cautious about jumping into the housing market this year, while a high vacancy rates and a glut of newly built condos in Quebec is pushing more potential first-time buyers into the rental market, according to Desjardins Group.

Mortgage rates have been falling since last week, when the Bank of Canada shocked markets by cutting interest rates by 25 basis points ( a basis point is a hundredth of 1 per cent.) Lenders soon followed, with major banks dropping five-year fixed rates mortgages to as low as 2.84 per cent and this week cutting their prime rates by 15 basis points, which quickly pushed variable-rate mortgages among the Big Six banks as low as 2.25 per cent.

On Friday, BMO said it was lowering rates on several of its fixed mortgages. The rate on a 10-year mortgage, for instance, fell 85 basis points to 3.84 per cent.

Many analysts had predicted that interest rates would rise this year, so the central bank’s unexpected decision to slash rates is widely expected to reignite the country’s cooling housing market. “Given the negative impact of lower oil prices on the Canadian economy, interest rates are likely to remain low for some time, supporting home sales, especially in Vancouver and Toronto where affordability is an issue”, said BMO senior economist Sal Guatieri.

But with mortgage rates falling only slightly and more Canadians telling the BMO survey they were planning to use lower rates to pay down their debt rather than load up on new ones, cheaper rates are expected to have a modest impact on the housing market.

Shortly before the Bank of Canada cut its target overnight lending rate, more than half of Canadians told an earlier BMO poll that cheaper rates would make them more likely to buy a home, though most said the drop would need to be 10 per cent or more to have a significant impact on their buying plans.

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This article appeared in the Globe and Mail on January 27th, 2015 and was written by Tamsin McMahon.

Canada’s major banks are heading into a renewed mortgage price war in the wake of the Bank of Canada’s surprise decision to cut interest rates.

Mortgage brokers reported that Royal Bank of Canada dropped its five-year fixed rate for qualified borrowers to 2.84 per cent over the weekend. While smaller, non-bank lenders have started offering even cheaper rates, RBC’s rate cut is likely a record for a major bank, said Drew Donaldson, executive vice-president of Safebridge Financial Group. The bank also slashed its posted 10-year fixed rate to 3.84 per cent, the lowest nationally advertised rate in the country, said Robert McLister, founder of Ratespy.com.

RBC spokesman Wojtek Dabrowski said the bank continues to “review the impact of the Bank of Canada’s rate decision,” and that the company’s “individual product lines continue to make pricing adjustments in the regular course of business to ensure we provide competitive rates in the marketplace.”

Bank of Nova Scotia and National Bank of Canada have also cut fixed rates on broker-originated mortgages by 10 to 20 basis points in recent days. Toronto-Dominion Bank said it was dropping its posted 5-year fixed rate on Tuesday to 3.09 per cent, down from 3.29 per cent.

Mortgage officials said RBC was among the last of the major banks to introduce new rate specials.

“National Bank already offers competitive rates over the mortgage rate spectrum as we moved early over the past weeks,” bank spokesman Claude Breton said.

A battle in the mortgage market seemed inevitable given that Government of Canada bond yields have plummeted in recent weeks, falling 57 basis points in the past month to historic lows. Brokers had predicted that falling bond yields were almost certain to drive down the fixed-rate mortgage pricing ahead of the competitive spring housing market even as banks have largely kept their prime rates, which govern variable-rate mortgages along with other types of loans, unchanged. All the major banks will soon be forced to follow the Bank of Canada and cut their prime rates 25 basis points to 2.75 per cent, Mr. Donaldson said. “We expect more cuts to come from all lenders,” he said.

Even ahead of the Bank of Canada’s unexpected rate cut last week, the country’s major banks already seemed poised for a new round of rate cuts this year. Earlier this month, Bank of Montreal chief executive officer Bill Downe told an industry conference the bank was expecting to “again have a fresh offer that is appealing to customers” in the spring. The bank drew the ire of former finance minister Jim Flaherty in 2013 after it dropped its five-year fixed mortgage rate to 2.99 per cent in what Mr. Flaherty called a “race to the bottom.”

The renewed price war is raising concerns that the central bank’s rate cut will add fuel to the country’s overheated housing market even as Canadians struggle under the burden of rising household debt. Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal warned last week that falling mortgage rates could lead to “a monstrous spring in the real estate market.”

Others argue that low rates may not be enough to kick start a housing market that had already begun to slow toward the end of this year as oil prices plunged. Even as they predicted that Canada’s central bank will cut interest rates a second time later this year, TD economists said Monday they expect Canada’s real estate market to fare poorly this year as cheap crude and sky-high house prices in major cities are making it difficult for new buyers to afford to jump into the market despite low mortgage rates. “The housing market is … projected to be a drag on growth, with changes in existing home sales and prices, as well as housing starts, forecast to tilt into negative territory,” the bank said.

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Get Ready for Interest Rate Shock in 2015, Consumers with high levels of debt to be most affected when Fed, Bank of Canada raise rates. This article appeared on CBC.ca website January 5th, 2015.

2015 is expected to be the first time in five years that benchmark interest rates are moved upwards, increasing the cost of borrowing. The U.S. Federal Reserve will go first; the Bank of Canada is expected to follow.

Most analysts expect the Fed to increase its key rate, which has been near zero for six years, by a quarter of a percentage point in the spring. Then, unless there is an unexpected shock to the U.S. economy, it will likely boost it gradually throughout the year, though the top rate is still expected to be a modest 1.25 to 1.50 per cent by the end of the year.

Canada will almost certainly follow, though with a time lag, depending on the state of the economy here.

Whenever it happens will be a shock to people carrying consumer debt, says Lynnette Purda, an associate professor at the Queen’s School of Business.

The interest rates on consumer loans, lines of credit, variable rate mortgages and some auto loans could rise immediately. For Canadians carrying consumer debt that will mean higher payments.

“Despite the low interest rates we’ve had for years, no one seems to have worked away at their debt levels. It will be a wake-up call for many consumers,” Purda told CBC News.

Consumers could pull back

Purda expects Canadians will pull back on big ticket purchases, like cars, appliances and furniture as interest rates rise.

And the biggest ticket purchase of all, housing, will not be unscathed. Overheated markets will finally cool and we may finally see the “soft landing” long predicted by the Bank of Canada and economists.

The timing of the interest rate increase – which has been predicted in past years without materializing – is no sure thing.

Although the U.S. Fed at its last rate announcement indicated it was most likely to move in the second quarter of 2015, much depends on economic indicators. Low oil prices have given a boost to the U.S. economy and left more money in people’s pockets, so there is a possibility the Fed could move even sooner.

TD Bank is predicting the Bank of Canada won’t move at the same time as the U.S. even though Canadian rates usually track what is happening in the U.S.

According to TD economist Leslie Preston, the rise may not happen here until the third quarter.

“We expect Canada to raise interest rates in October of 2015 – we expect two [quarter of a percentage] point interest rate hikes in the fourth quarter of 2015, so by the end of 2015, the overnight rate would be at 1.5 per cent – it’s currently at one per cent,” she told CBC News.

The challenge for Stephen Poloz

For Bank of Canada governor Stephen Poloz, this will be the first time he’s wielded one of the key tools in a central banker’s arsenal – the overnight interest rate which is the rate the central bank uses to lend to financial institutions.

And he’ll have to weigh inflation that currently seems quite high against the potential economic impact of higher rates.

The labour market is not yet operating near capacity, with many people still unemployed or underemployed, Preston said. And falling oil prices may slow capital spending and hiring, both in the oil patch and in sectors that supply it, such as equipment manufacturing.

“One of the challenges that emerged most recently are lower oil prices. Canada is a net oil exporter so when prices go down, it affects growth in Canada. This is a new headwind that’s come up,” Preston said.

While those factors may slow the Bank of Canada’s decision to raise rates, bond yields could rise in anticipation of a rate hike and that would affect fixed mortgage rates, according to RBC chief economist Craig Wright.

Wright said the rise in bond yields could catch people by surprise, as it may precede the Fed’s move on rates. Those who are looking to renew a mortgage in 2015 should watch what the banks do with their fixed mortgage rates, he said.

Renewing a mortgage? Lock in early

“What you tend to see is people anticipate a rise in mortgage rates and lock in,” he said, adding that only about 20 per cent of mortgage holders renew each year, so relatively few people will be affected.

Wright warns that people with credit card debt, auto loans and lines of credits are “vulnerable” to a rate hike, especially if they have high levels of debt.

But he is upbeat about prospects for the Canadian economy, saying it is likely to continue improving, with new jobs emerging in the manufacturing sector because of the lower dollar and growing exports. People who are employed are less likely to get in trouble amid rising rates, he says.

He believes Canadian companies will shrug off an interest rate hike and keep investing.

“Companies have a lot of cash to work with. As the economy improves we will be looking for them to build their businesses,” Wright said.

Wright sees the Canadian dollar headed lower next year, possibly below 84 cents US. That makes Canadian exports more competitive.

Upside of higher rates

“Higher rates have an important upside. If they are low for too long, we see bubbles appearing,” Wright said.

He points to the housing market as an example with certain markets overheated because rates are low. Higher rates should help correct any bubble in housing markets, he said.

An interest rate hike could also temper inflation, which is pushing the Bank of Canada’s two per cent target despite lower oil prices.

Preston also sees an upside for savers who want a safe haven for their money.

‘”The other side of higher interest rates is it would make life a little easier for a lot of pension funds or savers – the saving side of the economy has been struggling to get returns in a low-interest rate environment,” she said.

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