A Period of Transition
If Canada’s current economic standing, and the resulting housing market, had to be crowned with a theme, “transition” would fit the bill. There are a number of factors shaping the state of real estate and borrowing in our country, both macroeconomic and domestic. Let’s break down the main game changers affecting today’s mortgage consumer – and how they may change in the near future.
A Market Battered By Bond Yields
Government bond activity, a benchmark for fixed mortgage rates, is suffering the effects of a self-fulfilling prophecy, as yields have skyrocketed to new highs over the month of June. The spike started with warnings that the U.S. Fed plan to phase out their quantitative easing measures – a key method of economic stimulus that pumps $85 billion monthly into the U.S. economy. This is accomplished by the government buying up its own bonds, which in turn keeps yields – and interest rates – low. The news that the program may end by 2014 sparked a panic among those with interest-sensitive investments, which were promptly dumped in markets globally.
This mass exodus from government bonds, which in turn drove yields to new highs, then did result in an interest rate hike – an indicator of how investor sentiment and emotion can sway entire markets around the world. In Canada, five-year bond yields hit a new record yearly high of 1.92 per cent (up from the 52-week low of 1.10), and 10-year yields hit 2.55 – up from the low of 1.7 in May.
Higher Rates Biting Home Buyers
These higher interest rates are putting the squeeze on buyers and homeowners who have become accustomed to cheap money (after all, the days of record low “race to the bottom” mortgage rates were not so long ago). These suddenly higher rates are causing buyers and refinancing customers a lot of doubt about their timing – as pointed out by this piece in the National Post, locking in at 90 basis points higher could result in paying $60,000 more over the course of a mortgage. But waiting for rates to fall back to previous lows is always a gamble, as today’s rates are still competitive with those in the past.
A steeper barrier to entry on ownership also presents fresh challenges to the first timer segment, who have already sustained affordability-restricting rule changes implemented last summer, the effects of which resonated throughout the whole market.
An Oversaturation of Supply
With higher interest rates impacting housing demand, a potential surplus of starts in Canada’s biggest markets spark renewed housing crash fears. This concern persists particularly in Toronto, where the condo market remains a driving factor for the nation’s overall housing market, as overheated prices may be foiled by rising interest rates and a drop in qualified buyers.
Decreasing Consumer Debt
A silver lining to the dire debt warnings from Canada’s Department of Finance – Canadian households are effectively decreasing their debt loads. As we previously reported, a Genworth study has found that first time buyers are indeed putting off their home purchases due to last summer’s affordability reducing CMHC rule changes – and they’ve shifted their focus to growing their down payments.
“Canadians entering the real estate market are making financially astute choices by saving longer and putting down larger deposits on their homes,” according to Brian Hurley, Genworth’s CEO. “They continue to value homeownership and are being responsible about the way they enter into mortgage debt. This trend bodes well for a soft-landing of the housing market.”
The trend shows consumers are less willing to overextend themselves financially, and are perhaps refraining from home ownership before they’re truly ready.
Are you a recent home buyer or mortgage hunter? What has been your biggest challenge in this rapidly evolving market? We welcome you to share your story – shoot us a blog comment, or pay us a visit on Twitter and Facebook.