The unpleasant global economic situation is putting Bank of Canada policy makers into a corner to ease their tone on an eventual resumption of interest rate hikes. The Bank of Canada managed to maintain its overnight rate target at 1 per cent on July 17th, and borrowing costs have remained unchanged since September 2010.
Last week, five-year fixed mortgage rates recorded 2.99 per cent for the first time ever. However, these numbers changed just three days later, as bond yields increased and mortgage rates followed settling at 3.09 per cent at the moment. Furthermore, the five-year Government of Canada bond yields grew by 0.30 per cent since July 24th and are currently staying at 1.42 per cent. This represents a 26 per cent increase in just two weeks. It’s important to keep in mind that mortgage rates are directly affected by these bond yields, and if they continue to grow then we could expect mortgage rates to go up as well. In addition, the two-year Government of Canada bond yields have also risen from 0.93 per cent to 1.16 per cent, representing a 20 per cent increase. If the yields remain at this level, we could expect a slight increase in mortgage rates. Even though these numbers represent a historical low and there haven’t been such low five-year fixed rates for more than 40 years, this isn’t the time to panic. It’s still a good time for borrowing money.
This situation seems to be stuck in a cycle for more than two years. Rates grow temporarily, then they drop, then they grow again, only to drop in a short period of time and repeat the cycle. On the other hand, this pattern indicates that loans are cheap and increases the demand for investing in real estate.
New Mortgage Rules
A response to the housing craze and the threat of Europe still overhanging the sector has been tightening the screws on mortgage lending. The new mortgage rules should encourage homeowners not to stretch themselves too far when purchasing a home. Canada’s finance minister Jim Flaherty describes the government role in helping average Canadians save themselves from themselves:
But I think there’s a prophylactic function for government on this with respect to insured mortgages and it’s our job to try to be ahead of things and act — and act in a measured way, listening to the market. And I have been listening to the market and, quite frankly, I don’t like what I hear, particularly in the condo market.
The new rules will reduce the maximum amortization period from 30 years for government-insured mortgages to 25 years. Shortening the amortization period should reduce the amount of interest homeowners pay over the life of their mortgage. Furthermore, the government has also lowered the amount of money Canadians can borrow when refinancing to 80 of the appraised value of their property from the current 85 per cent. This measure promotes saving by property ownership and encourages homeowners to carefully consider signing up for a loan backed by their property. The finance minister has also lowered the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent to obtain Canada Mortgage and Housing Corporation insurance. This regulation stops people from spending more than 39 per cent of their gross household income on mortgage payments, property taxes, and heating. The main aim of the new measures is to ensure that the housing market in Canada remains stable and that Canadians don’t overextend themselves financially.
Mortgage Rates in Vancouver
One of the two hottest housing markets in Canada, Vancouver, has already begun to cool — mainly thanks to the new mortgage rules. The slowing demand in Vancouver’s real estate market has been obvious, as it recorded a ten-year low in sales.
The Real Estate Board of Greater Vancouver report shows the worst July sales numbers since 2000, posting 31.2 percent under the ten-year average with only 3,051 sales. Of these sales, about 2,098 sales were of residential detached, attached, and apartment properties, which recorded an 18.4 per cent decrease compared to the same time last year.
According to Phil Sopher, chief executive of Royal LePage Real Estate Services, a significant portion of the decline was caused by a slowdown in foreign investment. However, experts are still not sure if the latest trend in low mortgage rates will be able to save the market.
Nevertheless, prices in the Greater Vancouver Area remain steady. The composite benchmark price for all residential properties in the area grew by 0.6 per cent to $616,000 from a year ago, decreasing by approximately 0.7 per cent from June. The overall number of new listings reached 4,082 in July, representing the lowest number thus far in 2012. However, a total of 18,081 listings were active on the MLS last month, which comprises an increase of 18.8 per cent from a year ago.
Even though the economy remains relatively healthy, there are still serious concerns about the influence of international markets and new mortgage rules on the housing market. People in Vancouver are careful about making important financial decisions at this point.