Interest Rates, Interest Rates, and…

Interest Rates, Interest Rates, and…
Market Update Dec -2015,

November sales activity in the Vancouver market was 46% above the 10-year average… the trend continues.

The metrics that indicate that Vancouver is now into the strongest seller’s market of the past nine years. Prices continue to rise, and any and all supply continues to be consumed at a record pace.

Real estate in 2015 can be defined in a single word: relentless!

So what is happening with rates?

Great News, So-So News & Not Great News

The Great News

For those of us in variable and shorter-term fixed mortgages, the Bank of Canada held its key interest rate unchanged Tuesday (Dec 1) and has repeatedly said that what happens in the real estate market is not a significant part of their decision-making process.  Adjusting the overnight lending rate is large lever designed to guide the nation’s economy as a whole. Simply put, the manic goings-on in two cities’ hot housing markets (Vancouver and Toronto) are but a minor issue to the Bank of Canada. The same cannot be said for the Department of Finance. (More on that under Not Great News.)

The forecast seems clear for little change ahead to this interest rate.  In his Fall Fiscal Update, our new Minister of Finance, Mr. Bill Morneau, referred to a ‘stalling economy’ and a reduction in expected economic growth from 2% to perhaps 1.2%. These are clear indications that the Bank of Canada is unlikely to increase Prime any time soon.

The So-So News

For those seeking longer-term fixed-rate mortgages, fixed interest rates have risen an average of 0.25%. Not a massive leap, and not the beginning of the end of low rates by any stretch.

In real dollars and cents, this is about a $36.00 per month payment increase on the $300,000.00 BC average mortgage amount. Still amazing rates.

It is interesting how soon we can become jaded by low rates and somehow feel that a 2.79% rate (a rate unimaginable just a few years ago, or anytime in any decade previous) is somehow not still utterly incredible. Any rate starting with a 2 is incredible. 3’s were pretty special just a few years ago too.

Fixed interest rates are predicated on the bond market, and are not driven directly by Bank of Canada decisions. Where the bond market goes longer term (4-yr – 10-yr term), fixed rates follow.

Over the past few weeks the bond market has seen new life, and thus rates have risen slightly. This is partly due to speculation around our new federal government’s commitment to 10 billion dollars per year of deficit spending for the next three years. This will be good for business, and in turn should further fuel a recovery in the bond market, making investors happier… and making those seeking longer-term fixed-rate mortgages a little bit less happy. To be fair though, for some time to come interest rates are likely to remain quite close to the record lows we have enjoyed.

The stability is more likely to be found in variable-rate mortgages, and to some extent 1-, 2- and 3-yr fixed-rate mortgages. These are predicated on the Bank of Canada’s Prime rate, which saw two 0.25% cuts earlier this year. Prime is currently at 2.70%.

(Side Note: When the Bank of Canada increases rates by 0.25% again, will lenders increase their Prime by only the 0.15% that they cut by in early 2015, or will we be stuck with two partial cuts, yet get hit with the full increase? Time will tell.)

Considering that the idea of the Liberals’ commitment to infrastructure spending is an attempt to step on the gas pedal and power up the economy, one must also consider that a Bank of Canada increase to Prime would be akin to the Fed stepping on the brake pedal of the economy. It seems reasonable to expect some degree of volatility in the bond market — and thus variation in longer-term fixed rates — and equally reasonable to expect stability when it comes to Prime — and thus stability for variable-rate mortgages and shorter-term fixed-rate offerings.

Low rates (for some products) are here for some time to come.

The Not Great News

Just as the USA announces a reduction in down payment to as low as 3% down, with third-party income also allowed to be used, here in Canada we are hearing talk of the Department of Finance considering raising the minimum down payment as follows:

Purchase Price                  Minimum Down Payment

0$ – $500,000                                     5%

$500,000 – $700,000                        7%

$700,000 – $999,999.99                  10%

$1,000,000 and up                            20%

This is all just rumour, and none of this is firm… so we are told.

Expect these sorts of measures in an environment where interest rates cannot be increased as an alternative solution.

The little-known fact is that in 2008 at 5% rates, you actually qualified for more mortgage money than you do this year at rates around half that level. That is just how many regulatory changes have been made. Each reduction of amortisation by five years had the same effect on the maximum mortgage amount people qualify for as a 1% increase in interest rates.

What Does it All Mean?

Those who sell prior to buying, or worse yet, who sell without realising they need to RE-QUALIFY for their current mortgage, are learning some hard lessons.

Speak to your Broker (before you list, before you sell, and before you buy) and work out how to buy the next home before you sell your current home. And make sure you still qualify for the mortgage you currently have, or will need.

Selling is simpler than ever, and will remain so for some time — especially with a bit of pressure on rates motivating people to make a move… but to where?

BIKES FOR KIDS

I don’t pester clients for donations to the various causes that turn my crank; I just take care of it. So thanks to all of those with whom I have worked this year. Together we did some good in the Ride to Conquer Cancer and most recently we did good with the DLC Bikes for Kids program. We (that’s you and I) bought 21 bikes for kids for this Christmas. That is 21 very happy pre-teens and early teens on Christmas morning.

Thanks.

Why I like bikes, and thus this cause.

Thank you and best of the season to you and yours.

Dustan Woodhouse

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