Dear Clients, Friends and Neighbours,
What a year it has been. We went from a smoking hot market to a slowdown not seen since the financial crisis of 2008.
As most of you are aware the BOC Bank of Canada just raised interest rates another 50 basis points. The ongoing interest rate hikes and persistent inflation begs a few key questions …
- What Is happening?
- Why is it happening?
- Where is this all headed?
What is happening?
The BOC typically meets every 6 weeks to determine if they will move the overnight lending rate. This rate is what banks base their price rate on. Any movement in this rate will affect variable mortgages, lines of credit etc. These rates have been increasing for the first time since 2018. Increasing in an aggressive way, leaps of .5%, .75% and 1%. This most recent hike is compounding household stress more than ever before. The prime now sits at 5.95%. Many banks offer discounts of .3% so this puts the variable rate at about 3.65% … a far cry from where rates were in late 2020.
Another huge issue impacting lending is the qualifying rate. The stress test is either the current rate +2% or 5.25% whichever is higher. With fixed rates now over 5.5% the qualifying rate has increased to approx. 7.5%. This erodes borrowing power by about 25% across the board.
Also, variable rate mortgages with a fixed payment have either hit or are getting close to hitting their trigger point. Where fixed payments no longer service the interest of the mortgage. This means lenders are having to re-price the monthly payments to accommodate the original amortization of the loan. Extending the amortization can help to lessen this blow.
Why is it happening?
In a word, inflation. As soon as it was clear the government had lost control they decided drastic action was in order to keep inflation and hyper-inflation (a whole other blog post) in check. There are three main factors contributing to inflation.
- An increasing money supply. When covid hit governments around the world accelerated the printing of money, flooding the market. Approx 29% over just 2 years markets. This means there is more money chasing the same amount of goods, thus …
- Supply chain issues. With demand booming it soon became more difficult and more expensive to move goods around the world. Originally, many central governments thought the supply chain issues would be temporary, this has not been the case so far.
- The war in Ukraine. Just as rates started to take off, the war in Ukraine ramped things up even more. Much of Europe is now cut off from, cheap oil and gas and much of the world from exports like iron, steel, cereals, sunflower and seed oils, corn, wheat and potatoes.
Where is all this headed?
This bring us to forecasts and predictions for the BOC bonds yields. Which are not always right. However, at this time forecast assume we are at or near the top end for fixed rate mortgages and that there is another .25% to .5% to go for variable rates. Many analysts observe that about half of lenders are expecting rates to decrease by the end of 2023. The more aggressively rates go up the more likely we are to enter a recession.
All of the above factors coupled with sky high home prices, qualifying for a mortgage has become harder than ever. With sales continuing to slow and and inventory lagging we are seeing buyers and sellers in a holding pattern. We expect this pattern to continue to the end of the year.
Within the next 12-18 months we expect interest rates to begin to come down. We expect supply shortages to slowly improve for resale homes. Real estate values will likely continue to soften over this period but we wouldn’t be surprised if these values are pushed right back up again as soon as the lending landscape improves. One of the reasons for this will be the shortage of new development as many builders are pausing their projects in anticipation of costs coming down.
A mortgage provider can offer many creative options to homeowners and prospective buyers. Some of these include: re-financing, LOC’s, reverse mortgages, higher debt servicing, self-employed programs, private or B lending etc. Etc.
Similarly, obtain a free, no obligation home evaluation that can help you understand your homes value / equity and help you see the longer market picture.
As always, we are here to help.
Jenn & Colin