Mortgage Rate Hike = Interest Rate Up = Home Prices Down ?

First, they say Canadian mortgage rates on the rise …

Canadian mortgage rates on the rise

Mind you, the hike is solely to increase the already fat profit margin of banks, it has nothing to do with interest rate, not yet. For the record, interest is still the same old artificially suppressed rate we have known since time immemorial.

It’s not known why certain quarters interpret the hike in mortgage rate as the same as interest rate rise … And media outlet like Toronto Star even think this means home prices will fall as a result ?

It’s hard to phantom a simplistic situation like interest goes up equals home prices go down.

First of all, the so called “cooling” measures taken by Ottawa does only one thing – deny first time buyers from owning even just a shoebox measuring no bigger than 700 square feet. And the impending mortgage rate hike (forget about interest rate increase for now) will just intensify the situation and render majority of Canadians unable to own a home, quite possibly forever.

Should the interest rate goes up as believed will be the case, guess the end result is not just about home prices. It should be CATASTROPHIC, economically speaking ?

What comes around, goes around. What goes up. must comes down ?

Well, maybe true in the longer run (no idea how long though) because the universe has a tendency for equilibrium, but  chances are this will not be the case in the short term ?

Toronto home prices could fall as interest rates creep up

Even a half point rise in rates could translate into a 9 per cent slump in sales and a 2.6 per cent drop in prices by 2015, says a veteran housing analyst.

A sustained rise in interest rates could affect the broader economy in unpredictable ways, says veteran housing analyst Will Dunning. “It could be that once consumers start to expect prices to fall, the reduction in demand will be larger than it needs to be (based on economic fundamentals) and therefore price reductions will be larger than they need to be.”

A sustained rise in interest rates of just one per cent could cause Toronto area home sales to tumble by 15.3 per cent and prices to decline by 5.8 per cent by 2015, predicts a veteran housing analyst.

Even a half point rise in rates, which have been edging up incrementally the last few weeks, could translate into a 9 per cent slump in sales and a 2.6 per cent drop in prices by 2015, compared to where the market stood in 2012, notes economist Will Dunning in a rates-impact assessment released Wednesday.

“Once house prices start to fall, the outcome is unpredictable,” depending on how consumer confidence is affected, he says.

“It could be that once consumers start to expect prices to fall, the reduction in demand will be larger than it needs to be (based on economic fundamentals) and therefore price reductions will be larger than they need to be.”

“Moreover, because “housing wealth” is a very strong driver of job creation, what starts as a small drop in house prices can turn into a major event for the broader economy.”

Dunning is chief economist for the Canadian Association of Accredited Mortgage Professionals, the umbrella group for mortgage brokers.

But he stresses that he did this analysis on his own because he’s been asked so many times lately what could happen to the housing market – which has already suffered a slump in sales and an easing of growth in prices since tougher mortgage lending rules were introduced last summer – if interest rates inch up from historic lows.

Many economists believe Toronto’s decade-long housing boom has been largely credit-driven and that, as rates start climbing, the bubble could burst, especially in what the Bank of Canada has warned is the city’s over-supplied condo sector.

Dunning recently cautioned that Ottawa’s attempts to cool Toronto and Vancouver’s overheated housing markets, by making it tougher for first-time buyers to qualify for financing, is likely to result in a 25 to 30 per cent decline in housing starts by 2015 and 150,000 fewer construction jobs across the country.

And that dire prediction came before many of the big banks had started incrementally increasing rates on their fixed-term mortgages in the wake of market reaction to U.S. Federal Reserve Chairman Ben Bernanke’s recent warning that $85 billion (U.S.) in monthly bond buying may be coming to an end this year.

As of Friday, BMO’s five-year fixed mortgage climbed 0.20 per cent to 3.59 and RBC’s was set at 3.69.

Dunning believes the rate increases aren’t justified and that they could retreat somewhat in the next few months. But he adds that “if the rises persist, the risks (to the housing market) are increased.”

Dunning says that Toronto Real Estate Board sales numbers for June, being released in a few days, will likely show there has been a rush of buyers into the market recently, trying to fast-track house purchases armed with pre-approved mortgage rates negotiated before rates started increasing.

He calls that “borrowed activity from the future.”

“The real test will come in the fall,” says Dunning, when those pre-approvals have expired, especially if rates hold at their new or even slightly higher levels.

More by   @ Toronto Star

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