Higher Mortgage Rates On The Way

Earlier this month TD Bank surmised that while July home sales in many cities across Canada beat expectations, the market’s strength was likely only temporary.

Both CREA & TD attributed some of July’s activity to sales brought forward because of buyers taking advantage of low interest rates before they increased.   What would that mean?

“We expect to experience some pay back in August and September from the recent strength in sales” – TD Economics, August 2, 2013 

The risk of a hike in mortgage rates grew yesterday as Canada’s federal housing agency tightened mortgage rules for the 4th time in 5 years in order to cool our housing market.

Effective immediately CMHC is limiting guarantees it offers banks and other lenders.  With banks now having to bear more of the risk, rates are expected to increase as they pass on the cost to consumers.  Early estimates suggest this rule change will result in upping rates by 15 to 65 basis points.  (A basis point is 0.01%)

To put that in perspective, for a $400,000 home with a  20 year amortization, a 0.45% jump from a 3.14% rate would cost a homeowner an additional $91/month.

However, the CMHC cap will likely have unintended & unwanted consequences for Mr. Flaherty in the very near term.  From the same TD report linked above:

“For every 1% increase in the 5-year government bond yield, existing home sales tend to immediately increase by 6%, supporting the view that as interest rates begin to rise, households with pre-approved mortgages jump into the market.”

“However, those gains have historically been reversed in the following few months. On net, higher interest rates drive sales lower. A 1% increase in interest rates leads to a 1% decline in home sales.”

In short, we’ll likely see continued strong sales in August as buyers attempt to beat the looming rate hikes.  Please check back tomorrow for Calgary’s August 1-7 real estate market update.

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