Fixed Mortgage Rates are going Up!
Fixed Mortgage Rates are going Up!!
So what are the rates going to do? Well here is the information and I’ll let you decide. The 5 year bond rate, one of the biggest key indicators for 5 year fixed rate mortgage rates, has just increased over 23 points. The bond 5 year bond rate has been increasing for the last couple of weeks but this is the largest jump in the last year. Not very long after the jump, Royal Bank announced an increase in their mortgage fixed rates. Here is what they have announced.
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TD Canada Trust - Economic Report on Mortgage financing
Real estate comes roaring back - TD Economic Report
The performance of Canada’s real estate markets during the economic downturn has been remarkable. In the second half of 2008, there was a dramatic pullback in sales that led to a retreat in prices. However, the weakness proved surprisingly short lived. By the Spring of 2009, there were already signs that activity was coming back to life. This is particularly impressive, as it coincided with a deep economic contraction - accompanied by significant job losses, rising unemployment and weaker personal income growth. The ‘counter-cyclicality’ reflected the fact that improving financial conditions for real estate trumped weakening economic fundamentals.
The Bank of Canada’s unprecedented easing of monetary policy in response to the financial crisis set the stage for record low mortgage rates, which when combined with falling home prices, fuelled a sharp improvement in home affordability. Once people realized that the economic downturn was going to be ‘just’ a severe recession, and not a repeat of the 1930s, individuals who felt that their job was secure jumped back into the real estate market to take advantage of mortgage rates that were perceived as ‘too good to last’. At the same time, the Canadian banking system weathered the financial turmoil quite well, with the result that mortgages were accessible to the pool of buyers entering the market. The surge in sales far outpaced listings, supporting a rebound in prices. The Canadian Real Estate Association (CREA) estimate of national homes sales was up 18.5% year-over-year in August and national average home prices had increased 11.3% year-over-year.
The key issue is whether the low interest rate environment is creating an economic imbalance that requires a rebalancing of monetary policy. There is some evidence that real estate price growth might not be as strong as it appears at face value. The CREA statistics are based on sales through the multiple listing service (MLS) and the average of prices can be distorted by the type and location of homes sold. These issues are tackled by the Teranet-NB House Price Index, which is calculated by using the sale prices of homes that have been sold at least once before (and using only periodically adjusted weights for the six urban centres in the composite index). The Teranet-NB measure of home prices increased for a third consecutive month in July, but prices were still down 5.1% year-over-year. However, given the strong home price gains experienced during Canada’s “housing boom”, this decline in values may not have been sufficient to clear past excesses in some real estate markets. Moreover, the Teranet-NB measure has its own drawbacks, the foremost being that it is lagged two months and, anecdotally, late summer sales were very strong. So, both the CREA and Teranet-NB price measure show that real estate has turned a corner, but the latter doesn’t suggest as strongly that there was a problem brewing - at least as of July.
TD Economics believes that home sales will show some cooling in the coming months and MLS price growth is expected to return to a mid-single digit pace. First, a large number of recent sales were fuelled by pent-up demand created during the second half of 2008. At least half of that pent-up demand is likely absorbed. Second, the rebound in home prices and tighter mortgage pricing by some lenders is dampening affordability. Third, the economic fundamentals will remain weak, as unemployment will be slow to decline and personal income growth is likely to remain soft. Fourth, increasing confidence in the economic recovery and the rise in home prices is likely to induce a supply response, bringing an increase in listings that should moderate the growth in home sales and prices.
Overall, the most likely scenario is that home sales growth will moderate and home price growth will not become
excessive. Recent comments from the Bank of Canada suggest that they also believe the recent strength in MLS readings is temporary.
Bank of Canada may worry if real estate doesn’t cool
There is a material risk, however, that real estate may not cool. The persistence of extremely low mortgage rates might induce more buyers into the market and speculation could take on a greater influence. If so, the question is whether this could provoke a tightening in monetary policy, even in an environment where inflation as measured by the Consumer Price Index is at, or below, the Bank of Canada’s 2% target?
In the past, the general view has been that changes in the benchmark policy rate are a poor vehicle for addressing sectoral imbalances, largely due to the fact that the impact of interest rates cannot be targeted and instead impact the overall economy. As Fed Chairman Greenspan expressed during his final term, asset bubbles are notoriously difficult to recognize and monetary policy was better at “cleaning” up the mess after an asset bubble had burst by providing monetary stimulus. However, in the wake of the recent financial turmoil and deep economic downturn arising from the bursting of the U.S. real estate bubble, the view of ‘cleaning’ has been questioned and many central bankers now believe that monetary policy needs to ‘lean’ against the development of asset price excesses by running a tighter monetary policy.
Governor Mark Carney’s speech at this year’s annual Jackson Hole symposium seemed to show the belief that price stability is not enough and that financial vulnerabilities should be a consideration in monetary policy:
The main conclusion is that the Bank of Canada will likely be watching developments in Canadian real estate quite closely. Governor Carney has expressed the view that the strength in existing home sales are “temporary”, reflecting “pent-up demand” and improved affordability. However, if surging existing home sales do not cool, the Bank may be inclined to respond. Governor Carney’s comments suggest that government regulatory actions are preferable to monetary policy action to address sectoral imbalances, but given that the overnight rate is at a mere 0.25%, there is a significant risk that the Bank might lift the overnight rate to help temper real estate activity. And, the response could come while inflation is still below target. While housing replacement and mortgage interest costs are included in the CPI, their impact is very lagged (see TD Observation “Mortgage Interest Costs and Canadian CPI” March 25, 2009) and their weight in the CPI is modest. Again, the base case economic forecast does not anticipate that hot real estate markets will force the Bank of Canada’s hand, but it is a risk worth closely monitoring.
Is a Variable Rate Mortgage the way to go right now?
Low 5 year variable home loan rates
Some good points about a Variable rate Mortgage
There is no denying that Variable rates are Low. So low in fact that the average Canadian is starting to take a second look at the 5 year Variable rate Mortgage, when before it was all about the 5 year fixed. 1-3 years ago I would rarely have anyone ask me what my opinion on what is better the fixed or the variable, because the majority always went with the fixed. Now everyone keeps asking me, “what you think is the best way to go?’ So here is what I think and I’m not the only one thinking the same thing.
The 5 year variable or even the 4 year variable closed are at prime (2.25%) or slightly under prime. A couple of months ago you were lucky to get prime +. 4(2.65%). Yes you will have the best rate in town for the next 6-12 months and then most of the economists are expecting rates to rise. How fast rates rise and by how much, no one knows for sure and everyone seems to have a different opinion about that subject. Also remember that before all the mess in the U.S variable rate mortgage were prime - .8 - .9%. So prime doesn’t seem like such a deal when you compare it to prime - .8 - .9%
Professor Milevsky (at York University) who wrote a scenario based report on how more people should take a look at the variable option, in 2001, has made some interesting points. His recent comments suggest, now might not be the best time for a variable rate mortgage. Financial Post writer, Garry Marr, says Professor Milevsky is now “leaning somewhat in favour of the five-year closed fixed-rate mortgage.” Marr also writes, “Consumers getting into variable rate products are facing the risk that the discounts they negotiate today will look pretty ugly in a few months.”
With the 5 year fixed rate mortgage you are getting some of the lowest rates ever in History and you are guaranteed it won’t rise during that term. In short my answer is, “either way it is up to you, as you are the one whose name is on the mortgage”. But as well keep in mind that we are in uncertain economic times and my thoughts are to go with the fixed rate mortgage. We have mortgage rates as low as 3.69% currently and the average bank is under 4% on a 5 year fixed mortgage. For those that just can’t make up your mind you can always do Matrix type mortgage that can combine part variable and part fixed. That way if you make the wrong decision you’ll only be half wrong. Or if you look at the glass half full you would half right!! If you have any questions or comments please feel free to contact me.
