Of course if the US goes ahead and attacks Syria (kinda doubtful now), and Russia’s drawn in (ain’t gonna happen), then you can ignore the rest of this post. Gas would be $3 a litre in a few weeks and house prices fall by the day.
But let’s not go there. And no need to Hoover the Sobey’s tomorrow for Starkist and Cottonelle, either. There’s no wide war coming. Even tumbling gold and oil prices are telling you that.
That means all we have to worry about is hormones and mortgage rates. That’s plenty.
Realtors in Toronto and Vancouver are expecting a little rush of new listings over the next couple of weeks, and an equal gush of activity. It could be the final one for a long time. Fueling the buying, such as it will be, is the pop in mortgage rates which came with surging bond yields over the last couple of months. Those who pre-approved for five-year loans at 3% or less are desperate now to buy before their commitments expire.
As I’ve said before, it’s lunacy. Higher rates bring lower prices. Buying a house for more dollars and greater debt now rather than for fewer dollars and less debt later – just to save a half point on financing – is all you need to know about how the masses think. Ah well. C’est la vie. I tried.
If they only knew what’s coming…
Of course, bond yields have been backing off for a few days, as everyone knew they would, but I wouldn’t hold my breath waiting for bank mortgage rates to fall. The banker dudes know it’s temporary, since the odds are 100% that the US central bank will begin tapering back its stimulus spending – perhaps as soon as three weeks from now. This is the same action doomers on this pathetic site have been telling you for months would never happen. Of course it will. It’s here.
Over time rates will rise much more. The degree and speed depends on the US economy. If things go well, especially with job creation, then the Fed will increasingly stop buying bonds, dropping prices and hiking yields. The central bank rate itself may not increase for another two years, but that’s cold comfort to someone facing a mortgage renewal twelve months from now.
What to expect?
Right now the yield on a 5-year Canada bond is 1.95%, which is a giant .8% more than it was in April – and explains an equal surge in mortgage rates. The brainy economists at TD Bank are forecasting this yield to top 4% within four years, raising the cost of a five-year, fixed-rate mortgage to 5.74%. That’s one mama of a surge from the days of 2.69% we experienced just months ago.
Mortgages within striking distance of 6% would have a profound impact on real estate affordability. Housing economist Wilf Dunning is already unequivocal: combine current rates with F’s move to punt 30-year amortizations, and the market is pooched.
“The policy change made a year ago was equivalent to a 1 point rise in rates for anyone needing an insured mortgage (i.e. somewhere around 1/2 of buyers),” he warned a mortgage industry publication a few days ago. “I still believe that the impact of that is long-lasting (but it has been masked recently by the activity resulting from the rate movements). Adding the 1 point equivalent rise from a year ago to actual rises in recent times, there is potential for a major slowdown late this year.”
That major slowdown in 2013 will be nothing compared to what 2017 might bring, if TD’s correct. The bank says every 1% jump in the cost of a mortgage brings a rush of new buyers hoping to beat the increase (poor, deluded fools), followed by a permanent decline in sales. It also adds that, “if five-year interest rates were at more normal levels of around 7%, housing would be unaffordable to the average Canadian household.”
Of course it would be. That’s why real estate prices will fall, until affordability levels are restored. It’s a lesson today’s buyers – rushing to lock in low rates and high prices – will learn the hard way. Buying a house at the top of the market because financing’s cheap is like grabbing RIM stock at $140 because your broker’s margin rate was low. Instead of worrying about carrying costs, you should fret over capital values.
But then, this is the slaughter of the virgins. They know nothing of 7% mortgages. The last time real estate prices toppled, they were watching Big Bird and filling their Huggies. A shocking number think 3% loans are normal. They haven’t the foggiest notion of the Nineties condo collapse in Toronto, or desperate Calgary homeowners selling for a dollar to get out of their fat mortgages.
That’s the cool thing about history. It bites.