Canada's housing market is betting rates will never rise
BNN Bloomberg
The low interest rate loans that are helping propel one of the world’s frothiest property markets could also be what make it burst.
The low interest rate loans that are helping propel one of the world’s frothiest property markets could also be what make it burst.
For 12 consecutive years, Canada’s housing market has soared to record heights. Tight inventory, particularly in Toronto and Vancouver, has made property price appreciation and bidding wars among the most aggressive anywhere.
This has pushed Canadians into playing a very dangerous game. To hold down the size of their monthly payments as home values continue to rise, record numbers of mortgage applicants are opting to take out loans that offer the lowest initial interest rates. The problem with these loans, known as variable-rate mortgages, is that their rates automatically rise along with the country's benchmark borrowing cost. And by all indications it's about to go up — potentially by a lot. Bank of Canada policy makers are expected to lift the rate from 0.25 per cent at a meeting on Jan. 26 to quell soaring inflation and to then follow up with several more hikes over the course of the next two years.
An increase of more than one percentage point in the central bank rate — traders in Toronto are expecting a point and a half — would backfire on homeowners, driving the cost of their mortgages above that currently offered on conventional fixed-rate loans. To old hands in the housing market, the elements at play here — overstretched buyers suddenly hit with surging borrowing costs — are a cocktail for trouble. And while predicting a crash in the Canadian housing market has been an embarrassingly bad idea for two decades now, some are mustering the courage to raise the specter anew.
“If the Bank of Canada goes at least as far as what the rates market has priced in, you’re going to have arithmetically at least a 25 per cent plunge in residential real estate values,” said David Rosenberg, an economist who predicted the 2008 U.S. housing crash and now runs his own analytics firm, Rosenberg Research & Associates Inc.