Lower Affordability and Higher Mortgage Rates Don’t Deter Buyers
It’s getting tougher to buy a home in Canada – but that’s not stopping buyers determined to make ownership a reality. Home sales rose 6.4 per cent in Q2, despite diving affordability indexes for several home types, according to the latest RBC Economics Housing Trends and Affordability report.
Hot Demand For Detached
The index, which measures the amount of pre-tax household income required to cover the costs of homeownership at current market conditions, found that detached bungalows became 0.3 per cent more expensive last quarter, and two-storey dwellings increased by 0.4 per cent. The report stated that detached homes remain in high buyer demand, fueled further by a relatively low interest rate environment.
Craig Wright, senior vice president and chief economist at RBC stated in a release that demand and sales should remain stable – given no further surprises for the housing market.
“Homebuyers seemed unfazed by the slight deterioration in affordability – we saw the market regain some momentum in the second quarter with home resales increasing 6.4 per cent,” he says. “Resales should stabilize close to the recent not-too-hot, not-too-cold levels in the near-term, barring any further changes in housing policy by the federal government.”
Condo Demands Remain Cool
While prices rose for single detached homes, there isn’t much happening in the multi-family department – the affordability index for condos remains untouched, indicating that the first time segment just isn’t snapping them up as they used to. The decline points to fallout from last summer’s CMHC mortgage rules, which restricted refinancing options and capped the maximum amortization for high-risk buyers at 25 years, sending many buyers back to the savings drawing board.
Mortgage Defaults On The Decline
Further proof that the first timer segment are saving longer before buying – The CMHC reports that mortgage defaults (when a homeowner is unable to pay back their mortgage), showed a year-to-date dip of $72 million, with the arrears decreasing from Q1 levels 0.35 per cent to 0.32.
The crown corporation, which covers an estimated 75 per cent of insured mortgages in Canada, also indicated fewer high-ratio (less than 20 per cent down) mortgages in its portfolio, and a boost among buyers paying higher down payments on their home purchases.
Scared Bond Investors Continue To Push Yields
While mortgage rates are still low by historical standards (remember the high teens of the 80’s?), they have been on an upward trajectory as of late, and are perhaps set to rise further still if the current bond scare is any indication. Global markets are reacting once again to the possibility of an interest rate increase in the U.S. as Fed Chairman Ben Bernanke released a plan this week to end quantitative easing by 2014, and indicated that economic growth would sustain reduced stimulus.
“Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth,” said a statement released by the Federal Reserve.
It’s not the first time that global and emerging markets have panicked at the words of Bernanke, who, after previously indicating an end to quantitative easing this summer, back peddled in order to soothe bond-dumping investors with assurances of long-term QE and employment growth benchmarks.
The backlash at the time led to the current highs for American and Canadian bond yields and, ultimately, fixed mortgage rates. Now, as investors, including the governments of India, Brazil and Turkey, drop their U.S. bonds, the cost of borrowing has increased around the world and Canadians can be sure of further rises on the homefront.
Week In Review
We have indeed seen some upward movement among fixed rates this week. The slight easing experienced by one-year fixed rates has since rebounded to 2.39, and the10-year has increased by 10 basis points to 3.99 per cent.