Spotlight On Mortgages: August 23, 2013

Spotlight on Mortgages

Canadian High Rise Demand Hits New Low

There’s no denying it – a new high rate reality is upon us. This week brings about another fixed rate increase, as RBC hikes both their discounted and posted offerings between 20 and 30 basis points. This means the five-year fixed posted rate is now 5.34 per cent, and the discounted rate sits at 3.89. Canada’s biggest lender is joined by TD, which hiked the their special five-year posted rate to 3.79 and their posted to 5.14, and Laurentian Bank’s 20-point increase to its three, four and five-year offerings to 3.95, 4.74, and 5.34 per cent.

Last week, the CMHC indicated in the Q3 Housing Market Outlook that rates are foreseen to climb for at least two more years, as the market adjusts to recent restrictions made to lender mortgage funding. This was backed by members of our Mortgage Rate Outlook Panel, who indicated that higher rates are indeed on the horizon. “[Restricting] the amount of CMHC guarantees under the NHA MBS program will probably force through an increase in borrowing costs to the banks,” said Dr. Ian Lee, panelist and Director of the MBA program at the Sprott School of Business. “The banks will most likely pass on these costs via an increase in fixed mortgage rates of 0.25 per cent to 0.5 per cent.”

High Rates Haven’t Deterred High Demand

Economists tend to say that a higher rate environment will inevitably lead to a softening market – but the resilience of Canadian housing demand continues to defy negative expectations. In fact, home sales have experienced recent gains, increasing 9.4 per cent year over year in July, and prices are up by 8.4 per cent to a national average of $382,373, according to CREA.

Demand and prices for single family housing remain strong, especially in Canada’s urban centres. In fact, demand is so high for ground-related housing (single detached properties and townhouse units), that the latest numbers show a drop in sales – because there aren’t enough to go around. The Building Industry and Land Development Association reports that while sales levels are 45 per cent below the 10-year average for low rise homes, the culprits are decreased availability and increasingly high prices – not a lack of interested buyers. BILD also reported an increase to their low rise price index to $645,854.

High Rise Condo Market Is The Exception

However, housing demand kryptonite may be found in the high rise condo market. BILD reports that July condo sales in the Greater Toronto Area (the largest condo market in North America), hit a 10-year low, declining by 34 per cent, and a price index decline to $430,930.

Why have glittering units in the sky become passé? Blame tougher buying conditions and decreased affordability for the first time buyer segment, who have been inundated with hurdles on their way to homeownership. Last summer’s CMHC-imposed amortization cap meant many would-be buyers were pushed out of the market, forced to save higher down payments and adapt to shorter mortgage payment timelines. As many urban first timers traditionally turn to the condo market for their starter homes, declining sales show these buyers-turned-savers are very much missed.

So What’s With The Constant Construction?

You may be thinking – if the condo sector is experiencing a downturn, why are towers sprouting on every downtown street corner? Construction levels are still at record highs, with 256 high rise developments – 66,126 total units – under way, 17,000 of which are scheduled for completion this year.

However, the condo development industry is going through a period of self discipline, imposed to say a step ahead of slack demand. While the cranes crowding the skyline don’t make this immediately evident, only two new projects were announced by GTA developers last month. Buyers can expect condo availability to contract once current projects, which were pre-sold and financed a few years ago, wrap up.

“It’s important to understand that while we are experiencing record-high construction, these homes have been sold two to three years ago and are not an accurate representation of today’s new homes market,” said BILD President and CEO Bryan Tuckey in a statement. “Sales activity in 2013 has been low and we will start to see the effect of that in two to three years.”

Week In Review

While big bank posted rates may be in for a hike, there has been very little change to the best discounted rates on the Canadian market. Only one-year fixed rates, saw any movement – a very moderate drop of one basis point.

Related Topics

Mortgage News / Mortgages

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