Call Off the Housing Market Crash
Speculation has abounded over the direction of Canada’s mortgage market ever since CMHC unveiled their latest round of mortgage restrictions this summer. While experts could all agree that the market was in for a correction, a consensus couldn’t be reached on how it would land – with a so-called crash, or a moderate softening. I’ve consistently taken the soft landing approach and it looks like I’m in good company, as Bank of Canada Governor Mark Carney also doesn’t believe a crash is in the cards.
That’s right! Carney, along with Scotiabank’s Senior Economist Adrienne Warren, believes the market is righting itself and will settle into a sustainable housing solution – certainly a far cry from this summer’s doomsday call for a 25 per cent crash. Another encouraging sign is in Canadian consumers tackling their debt-to-disposable income ratios as of late and taking the forthcoming interest rate hike warning seriously. The amount of fixed rate mortgages out there have almost doubled this year and now roughly 90% of mortgages are in a fixed term.
Fixed Vs. Variable: The Never-Ending Debate
Yes, I’m sick of this too – but it’s a timely question as Carney pegs the popularity of fixed mortgage rates on the record lows set by the Bank of Canada. Take a peek at “More Historical Five Year Fixed Mortgage Rates” on RatePulse. You’ll notice that only three short years ago in January 2009, the best five year fixed rate was 1.39 per cent higher than the best five year variable rate. Since then, the gap has really narrowed; the best 5 year fixed rate hit 2.76 in November while the variable bounced around the 2.54 per cent area. With the recent spread so small, why take a chance when you can lock in for a mere 20 basis points more?
Think of it as a form of insurance; we arrange insurance for our cars, homes, boats, lives and even our kids’ lives – why? Well in some cases because it’s the law, but in other cases, peace of mind! We choose to pay a premium to protect us from something – be it an accident, a fire, a casualty – but really, the unknown. Since fixed rates and variable rates are quite comparable nowadays, many are seeing fixed rates as a type of insurance and are willing to pay a small premium to protect them against rate hikes in the future.
But Wait – Variable Isn’t Out of the Running: Understanding the Fine Print
It’s true consumers seem to have shifted their preference from variable to fixed, but treating the fixed rate as a pseudo-insurance policy is not the only answer to rationalize this change. Pricing is obviously a factor as well. A couple of years back you used to be able to negotiate an aggressively priced 5 year variable rate with your banker around Prime – 0.8 per cent (take this from an ex banker). Now? All major banks have posted at Prime plus.
If you’re still hmmmming and hawwwing over variable and fixed rates and aren’t quite ready to lock in at a higher fixed rate, start asking questions! Maybe your variable rate allows you to lock in at any time. Be sure to understand what rate you will be offered at this point in time – specifically if they are posted rates or discounted rates. All of these little details make a big difference!
If One Goes… They All Go!
We’ve said all along… what goes down must eventually come back up! So what will happen when the BoC inevitably raises their overnight lending rate? An increase in the overnight lending rate will trigger an increase to the prime lending rate which means that variable rates will increase too as their pricing is based on prime. But what about fixed rates?
For starters, the BoC will ensure that the Canadian economy can sustain an increase to rates and a possible increase to inflation before making a move. They will consider many factors, including the states of both the domestic and global economies. Once in check, we will begin to see slight movements in rates.
But when the health of the global economy starts to improve, investor sentiment may become less risk averse. They’ll begin to regain their confidence in the market and may pursue investments with a bigger bite than the relative safety of bonds. As interest rates increase, bond prices will decrease and the quantity demanded for bonds will too decrease. Since bond prices and yields are negatively correlated, the change will increase bond yields and therefore increase fixed mortgage rates as well.
RateSupermarket.ca Week in Review
Nothing too exciting to report this week in mortgage rates activity. The biggest change was witnessed as the two-year fixed rate dropped 10 points, from 2.59 to 2.49 per cent. Three year fixed also saw a moderate change (and I mean teensy) with 2.69 inching down to 2.68 per cent. A new low for seven-year variable rates was also seen at 3.79 per cent. East enders rejoice – it’s only available in Nova Scotia.