The Bank of Canada’s move to hike its policy rate by 50 basis points Wednesday will be quickly noticed by variable-rate mortgage holders and Canadians holding a home equity line of credit, but if inflation persists and rates have to rise more quickly — something the central bank’s chief acknowledged was a possibility — the effects are not likely to stop there.

“Higher and faster rate hikes will affect mortgage affordability for a significant population of homebuyers,” RatesDotCA mortgage agent Sung Lee told the Financial Post in an e-mail. “Major banks have already pushed fixed rates higher several times over the past few weeks with some approaching the four per cent mark for uninsured products.”

The Royal Bank of Canada and Toronto-Dominion Bank were the first of the Big Six to react to the shifting interest rate environment, lifting their prime rates by 50 basis points to 3.20 per cent starting on Thursday, with Scotiabank and CIBC quickly following suit.

But the ripples from the rate increase could extend beyond mortgage carrying costs.

James Laird, co-founder of Ratehub.ca, noted that higher mortgage rates are expected to put downward pressure on home prices across the country. The national average price of a home reached $816,720 in February, according to figures from the Canadian Real Estate Association.

And here could be more pressure weighing on Canadian home owners as Bank of Canada Governor Tiff Macklem said he was prepared to get more aggressive with interest rate policy depending on how the economy recovers and how the outlook for inflation, which stood at a 30-year high of 5.7 per cent in February readings, evolves.

“If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening once we get closer to the neutral rate and take stock,” Macklem told reporters during a Wednesday press conference. “On the other hand, we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target.”

The Bank of Canada estimates that a neutral rate stands between two per cent and three per cent. Macklem suggested the benchmark rate could rise above that range, potentially taking the overnight rate to 3.25 per cent.

“Rates are going up this year, but we do not know what next year will bring. This creates a bit of a roller coaster experience for current and would-be homeowners,” wrote Leah Zlatkin, a licensed mortgage broker at LowestRates.ca. “These increased costs have a real impact on homeowners’ wallets. Some variable rate holders may think about switching to a fixed rate to bring some stability to their outlook, but anyone with variable rate will still be saving money over a fixed rate right now.”

Zlatkin added that if the Bank of Canada raises interest rates as much as 150 more basis points over the course of the year, it would bring prime rates to around 4.7 per cent.

“There is a whole cohort of home owners that have never experienced a mortgage rate over four per cent,” Allison Van Rooijen, vice-president of consumer credit at Canadian credit union Meridian, told the Financial Post. “It’s been so long since rates have been at the four per cent or higher range, and we’re starting to see that increase now on the fixed rate side and we expect it’s going to continue to persist.”

Van Rooijen added that the good news is lenders typically look for financial resiliency with their clients and ensure borrowers can withstand rate increases. However, if mortgage holders are beginning to feel a pinch in their monthly expenses, it could be time to seek out professional help and weigh their options.

“There has been a ton of innovation in in the mortgage space and the debt consolidation space even in the last five years,” Van Rooijen said. “There may be solutions borrowers aren’t aware of at this point in time that can help them before things get worse or before rates go up to a point that they’re really pinched.”

-Steph Huges, Calgary Herald

Five year fixed interest rates have been rising steadily since last summer / fall from a discounted low of approximately 1.69% to current discounted rates of 2.99% The five year rates are set using the five year benchmark bond as a base or source of funds. On another note, The Bank of Canada meets March 2nd to review the overnight rate which the banks use to determine prime and variable rates. Prime is very likely to increase as well.  

A few points to remember and consider;

• The stress test rate is used to qualify mortgage applicants, currently 5.25% or contract rate plus 2%.
  
• The rate is set by the Ministry of Finance using bank posted rates as a guideline.
  
• As five year rates are rising in our current environment expect the banks to increase their posted rates.
  
• Once the posted rates are increased the stress test rate will increase. Your buyers will qualify for a smaller mortgage.
  
• IT IS CERTAIN THE STRESS TEST RATE IS GOING UP.
  
• Let’s say the stress test rate goes up by ¼ % to 5.5 %. For each 25 basis point increase or ¼ % increase buyers loose approximately 2.3% of their purchasing power.
  
• It is reasonable to expect the stress test rate will go up by ½ % this year. Who knows but seems reasonable.
  
• For a typical average price house in Calgary of $475,000, buyers would get a $22,000 smaller mortgage.
  
• Lots of assumptions about maxed out debt service ratios and such but still buyers will be getting smaller mortgages soon.
  
• Big scheme of things, nothing we as realtors, mortgage brokers, and buyers can do about this, but it might be crucial for some buyers to act sooner rather than later
  
• Also this could really impact folks refinancing and needing to get to a certain mortgage amount for equity out of their existing house to get a down payment

A quick request to start this weeks showing report. I’d like to start including an entertaining story from the interesting things that we see while showing properties. This will be anonymous, so if you have a funny showing story you would like to share with me, please send it over and I will try and include it in future emails.

This week’s showing report is showing a decent drop off in activity across Alberta which is fascinating as we had another uptick on showings for CIR Realty’s showings. For CIR’s showing activity we saw a big jump in the $300,000 – $500,000 price ranges.  In fact, we had over 1,000 showings in that price range in a single week!!

We have also been tracking the weekly sales activity to correlate it to the number of showings, and while it is early in the process to tell, it appears that there is a two week lag from heightened showings to the sales increasing.  Based on that, we should see an increase in sales volume over the next couple of weeks as we have had increases in showings for two straight weeks so we will keep a close eye on that. 

If these correlations are correct, then I am anticipating based on the showing activity in April, that there is an excess of buyers in the $500,000 – $600,000 and $700,000 – $800,000 range that are looking but have not bought yet.  And based on this weeks and last activity we may see a jump in sales in the $400,000 – $500,000 range.  

We will keep a close watch to see if these trends develop further.

-Steve Phillips, CIR Realty

Our latest release of Mortgage and Consumer Credit Trends data tables cover the fourth quarter of 2020. Here are some key highlights from the data:

Delinquency rates edged lower across all credit types

Mortgage delinquency rates in Canada edged lower to 0.25%. This is the lowest level in the five years that CMHC has reported mortgage delinquency rates. Rates in the major CMAs were below the national average and have fallen to:

• 0.10% in Toronto
• 0.14% in Vancouver
• 0.20% in Montréal

Delinquency rates trended lower across all non-mortgage credit types compared to Q4 2019 to:

• 1.18% for credit cards (down by  44 basis points)
• 1.70% for car loans (down by 29 basis points)
• 0.55% for lines of credit (LOC) (down by 9 basis points)
• 0.15% for home equity lines of credit (HELOCs) (down by 2 basis points)

Mortgage holders continue to have lower delinquency rates for all other major credit types compared to consumers without a mortgage. That said, the gap between the two groups shrunk.

Mortgage delinquency rates trended lower across all age cohorts:

• The 25 to 34 year olds, who are typically first-time homebuyers, saw their rate decline to 0.20%, the lowest level of any cohort. This age group accounts for 15% of all mortgage holders.
• Seniors aged 65 and over, who account for 12% of all mortgage holders, registered the highest delinquency rate of 0.33%.

Delinquency rates declined across all mortgage loan amounts. The highest delinquency rate, at 0.32%, remained for mortgages with the lowest value at origination that is less than $200,000.   

Borrower credit scores trended higher

The share of outstanding and newly originated mortgages held by consumers with a high credit score (700 and above) continued to edge higher. For the outstanding mortgage loans, this share reached 87.71% which is the highest level in the last five years it has been reported by CMHC. For the newly originated mortgage loans this share edged up to 86.06%.

Compared to a year ago, 83.79% of mortgage holders and 83.56% of consumers without a mortgage either maintained or improved their credit scores. The average credit score increased to:

• 765 for mortgage holders
• 753 for non-mortgage holders

The average Bankruptcy Navigator Index is a ”predictive” score that estimates the likelihood of a consumer to become insolvent in the next 24 months. Higher scores indicate a lower risk. The score for both mortgage holders (938) and non-mortgage holders (923) reached the highest level over the past five years. This suggests a lower probability of bankruptcies. 

Non-mortgage outstanding balances declined

Total non-mortgage outstanding balances declined compared to Q4 2019. The most notable decline was for credit card outstanding balances:

• 14.17% for mortgage holders
• 13.76% for non-mortgage holders

This is followed by lines of credit outstanding balances, which decreased by:

• 10.72% for mortgage holders
• 10.14% for non-mortgage holders

Compared to the previous year, average monthly payment obligations declined for all non-mortgage loans with the exception of car loans. Monthly car loan payment obligations increased by:

• 1.5% for mortgage holders
• 1.3% for non-mortgage holders

Mortgages accounted for a larger share of consumer debt

Newly originated mortgages as a share of all mortgage loans edged up to 4.94% from 4.39% the year prior. New mortgage loans accounted for 6.93% of outstanding mortgage dollar balance compared to 5.73% in Q4 2019.

Mortgages with a higher loan amount ($400,000 and over) at time of origination as a share of all outstanding mortgages increased. In Q4 2020, these mortgage accounted for 41.42%, up from 37.98% the year prior.

Mortgage loans accounted for a higher share of total outstanding consumer credit balance, which increased to 68.91% from 66.85% a year ago.

Effects of the COVID-19 pandemic

The COVID-19 pandemic has had significant social and economic impacts in 2020 throughout Canada.  We have observed unprecedented declines in employment, and increased financial stress for households. The pandemic poses a major risk to housing and financial markets. CMHC continues to monitor the economic impacts associated with the severity and duration of COVID-19.

-CMHC

Canada’s top banking regulator is proposing to raise the mortgage stress test level to 5.25 per cent or two percentage points above the market rate, whichever is higher.

That’s a hike from 4.79 per cent, which is the current average posted rate at Canada’s biggest lenders.

Thursday’s change by the Office of the Superintendent of Financial Institutions (OSFI) means borrowers will need to prove that their finances can pay for the loan at that higher rate, regardless of what a lender is willing to lend them. This would make it harder to qualify for a home loan, shrinking the pool of qualified borrowers and ultimately bringing down some of the upward pressure on house prices in the country.

The regulator says it is seeking submissions from stakeholders about its proposal until May 7th, before the new rules would be put into place for uninsured loans as of June 1.

• Bank of Canada plans to keep interest rate near zero until 2023

Known colloquially as the “stress test,” the rules came into force in early 2018 and had the effect of cooling down what was at the time an overheated property market — although after they were announced in late 2017, there was a flurry of last-minute buying by people trying to get in before they would be locked out of buying.

Once they were in place in early 2018, the frenzy died down.

While there are a number of different facets to the rules, officially known as the B-20 Guidelines, they boil down to essentially one principle: would-be home buyers would have their finances tested to see if they could cover their mortgage payments should rates rise much higher than they were at the time they signed up for the mortgage.

• Mortgage rates hit a new low, with Canadian bank posting below 1%

The testing bar was set at whatever was higher: two percentage points higher than the mortgage rate they were offered, or whatever the average five-year posted fixed rate is at Canada’s big banks. 

Functionally, that five-year average rate has been the bar that most uninsured borrowers have been asked to meet, since market rates have been much lower than two percentage points below that level for almost the entire period of the stress test’s existence.

A look at the numbers

Currently, the average posted five-year big bank mortgage rate is 4.79 per cent, but it’s not difficult to find a loan at about half that rate, a little over two per cent, by shopping around.

A look at the numbers shows how easy it is to get in over your head.

At two per cent, a 25-year mortgage of $300,000 would cost $1,270 a month. But if rates were to rise to 4.79 per cent, where the big bank posted rates already are, that monthly payment goes up by almost $500 a month, to $1,709.https://datawrapper.dwcdn.net/Dy5YB/1/

That’s an increase of almost 35 per cent to a borrower’s monthly budget. 

At 5.25 per cent, the new stress test rate, the monthly payment would jump to $1,788 a month.

If the numbers show that a borrower’s finances wouldn’t be able to withstand a significant rate hike, the borrower fails the stress test, and a lender isn’t allowed to lend them money. 

COVID-19 changed the plan

The banking regulator was looking into perhaps setting some other sort of benchmark for the stress test prior to COVID-19, but the pandemic shelved those plans.

In addition to the higher rate, OSFI also says it plans to “revisit the calibration of the qualifying rate at least once a year to ensure it remains appropriate for the risks in the environment.”

The move by OSFI comes as the average price of a Canadian home rose by 25 per cent in the year up until the end of February.

That’s prompted a flurry of calls for policymakers to step in again to make sure borrowers aren’t getting in over their heads.

“The current Canadian housing market conditions have the potential to put lenders at increased financial risk,” OSFI said in a statement Thursday. “OSFI is taking proactive action at this time so that banks will continue to be resilient.”

• Average Canadian house price continues to defy expectations, up 17% in past year

While the regulator’s goal is to ensure the stability of the system for banks, not for borrowers, James Laird, co-founder of Ratehub.ca and president of mortgage brokerage CanWise Financial, says ultimately the move may be what’s best for homebuyers, too.

“In the near term, this change will make it more difficult for first-time homebuyers to qualify for a mortgage,” Laird said, adding that the move will have the effect of lowering buyers’ purchasing power by about five per cent once it’s in place in June.

“However, if this policy has the desired effect of slowing home value appreciation, it may be a good thing for first-time homebuyers in the long run.”

• ANALYSISIt’s not just Toronto and Vancouver — Canada’s housing bubble has gone national

Sherry Cooper, chief economist at Dominion Lending Centres, says the move may well take some of the froth out of market in the long term, but in the short term it’s likely to make this year’s feverish spring market even hotter.

“This all but ensures that the current boom in home buying will accelerate further in the spring market — providing an impetus for borrowers to get in under the June 1 deadline,” she said. “OSFI’s move will trigger an even hotter spring housing market as demand is pulled forward just as it was before the January 1, 2018 implementation date of the current B-20 ruling.”

Since the markets were more or less turned off this time last year, we took a look at the ten year averages to compare instead of comparing year over year. The total amount of sales across Alberta in March exceeded the ten year average for the month by 56%.

The hot spots in the Province continue to be the bedroom communities such as Cochrane, Okotoks and Airdrie…plus Canmore.  The markets across the Province are all moving quite well with most out performing the ten year averages for sales.

The big question right now is how long this can last, and will the newly implemented restrictions have an impact. The truthful answer is that no one knows for sure as anything can, and has happened in Real estate….and then you add a Pandemic to the mix.  We continue to be in unknown territory.

However, given that we have come through the past year without the bottom falling out of the market, consumer confidence has returned to Real Estate. All indications support the strong markets to continue as the first time home buyers are fuelling the market, allowing teh move up buyers to make a move up the property ladder. With incredibly low interest rates, increased savings and limited options as to where to spend money, people are choosing Real Estate.

While the current pace is not fully sustainable, there are currently more buyers than homes available. Based on the fact that we had just under 14,000 showings on CIR Realty’s listings alone for the month of March, that suggests that there are many buyers still seeking homes.

-Steve Phillips, CIR Realty