By Canadian Mortgages Inc.
It was the beginning of last month when bond prices plunged and RBC increased mortgage rates in response. Not too long after Scotiabank and TD followed suit. But while homeowners and home buyers are groaning about these higher mortgage rates, they’re not all bad. And in fact if you look at them from a certain perspective, they may even be seen as a good thing. Why?
Rates are still incredibly low
Yes, the 3.69 per cent is higher than the 2.99 per cent that some of these banks have been offering since the recession. But remember November 2008? Rates on conventional five-year mortgages were sitting at 7 per cent – and many thought those rates were low! No, you won’t be able to get the hot deal on your mortgage that you would have say a year ago. But you can still get a pretty good one.
You have time to plan
Yes, oftentimes a small rate hike such as the 30 basis points we’re looking at on a 10-year-closed mortgage (RBC) is indicative that rates are going to climb even higher. But use these small rate hikes as the clouds that gather in the sky just before a massive storm. Look at them, and make adjustments for the conditions ahead. Is now the time to switch to a fixed rate before rates go even higher? Do you need to refinance to make payments more affordable for you? Small rate hikes are an opportunity to plan for your mortgage, and make sure that you’ll be able to afford it if rates go even higher.
Rising mortgage rates don’t indicate trouble
Yes, they may spell a bit of trouble for your household budget, especially if you’ve strapped yourself so tightly that you now have no wiggle room. But bigger picture. Mortgage rates were only put down so low in the first place because the economy was struggling. In fact, all economies were struggling – a lot. Rates were lowered so that consumers would continue spending and our domestic economy would be kept afloat. Now those are no longer needed and banks can start raising their rates a bit. Higher rates sometimes mean a stronger economy, and stronger economies equal out to more incomes and more jobs.
Not all banks have increased their rates
As we’ve stated, Scotiabank, TD, and RBC are the only banks that have increased their mortgage rates so far. Other lending institutions may be watching and waiting to see what happens for them after this move, to see if they follow suit as well. In the meantime, if you’re still looking for those rock-bottom deals and historical lows, these other institutions might be the ones to check.
Most Canadians don’t even use a credit card.
Lest we forget, the old warning remains very alive …
Moody’s analysis contemplates 44% drop in Canadian housing pricesBarbara Shecter | 13/03/11
A severe economic shock, such as the kind that hit Japan in the early 1990s and California and Nevada in 2006, would have to knock Canadian housing prices down by 44% to cause securities linked to Canadian mortgages to lose the highest ratings assigned by Moody’s Investors Service.
OTTAWA — Canada’s real estate bonanza of the past decade has come to end and the long-term trend as one of the most profitable places to invest is also not encouraging, a new research paper from the TD Bank argues.
Such a house price decline, were it to happen, would be driven primarily by the phenomenal upswing in Canadian home prices over the past decade, Moody’s said.
Canada joins Spain, as well as the United Kingdom and Australia, in the ratings agency’s assessment of countries where growth in housing prices over the past 10 years has driven their values away from sustainable market fundamentals and into “overheated” territory.
“As with Australia, Spain and the U.K., we expect house prices in Canada to suffer the most due to the misalignment of current house prices with historic fundamentals,” Moody’s said.
The ratings agency released the report Monday that included its housing market analysis, along with request for comment on its proposed approach to analyzing the credit risk of non-insured mortgage pools.
“Moody’s Investors Service is in no way predicting the extent nor the causes of a large scale house price depreciation in Canada,” spokesperson Thomas Lemmon said in an emailed statement.
“Along with many other factors, the home price component of our analysis provides that in order to achieve our highest rating, a mortgage pool would have to be able to withstand a 44% downturn.”
Moody’s is the second ratings agency in as many weeks to seek input on a proposal to change the methodology used to analyze securities linked to mortgages.
Last week, London and New York-based Fitch Ratings unveiled a proposed a two-step model that reduces home prices to a “sustainable” value based on a number of factors including data provided by Canadian banks. It then further subjects the homes to a “stressed market” value decline assumption.
Fitch said Canadian home prices are overvalued by about 20%.
Ratings agencies came under harsh criticism in the aftermath of the financial crisis of 2008 for what was perceived as a failure to predict the U.S. housing market meltdown that precipitated it.
Since then, there has been an attempt to strike a balance of thorough analysis with timely analysis, according to Grant Connor, an associate in equity research at National Bank Financial who previously worked on structured finance at Moody’s.
“At the simplest level, a stress case scenario should represent a realistic worst case scenario,” Mr. Connor said.
As with Australia, Spain and the U.K., we expect house prices in Canada to suffer the most
The model proposed by Moody’s on Monday determines house price “stress” rates, used to assign ratings, by looking at variable factors such as house price and income growth over 10 years, and fixed factors such as monetary policy.
The analysis of housing prices in the event of economic shocks includes data from Finland in 1989, Japan in 1991, and Hong Kong in 1997, as well as Ireland, Nevada, and California in 2006.
The “variable” analysis assesses how much current house prices have departed from “sustainable” market fundamentals. The assumption is that, in the event of a severe economic shock, expected demand that has been baked into current house prices will not materialize. In Canada, the growth in house prices over the past 10 years has ‘’far outstripped” the growth in incomes, according to Moody’s.
“Think of it like an elastic [being stretched],” explains Mr. Connor of National Bank Financial. “The snap back is going to be a lot harder.”
Moody’s also assesses the “fixed” factor, which rates how vulnerable the consumer is to economic shocks, whether there is a large oversupply of houses, how effectively monetary policy can alleviate the shock, and how dependent the economy is on the real estate sector.
Canada scores better in this area, said Mr. Connor, because the stability of the country and its monetary policy is taken into consideration. While Canada’s household debt to income ratio is very high, at 154%, Moody’s notes that savings rates are higher than in some jurisdictions such as the United Kingdom.
In addition, Moody’s does not seem overly concerned about an over-supply of housing with the possible exception of the condominium market.