mortgage rates

5 Factors That Reveal Where the Real Estate Market Is Really Headed

5 Factors That Reveal Where the Real Estate Market Is Really Headed

In a July release, the Canadian Real Estate Association reported that home sales had fallen for three months in a row after reaching an all-time high in March.1 So could one of the world’s hottest real estate markets finally be headed for a downturn?

We wouldn’t bet on it. That’s because even though sales have slowed, it was still the strongest June on record—and 13% higher than last year.1

“Don’t be fooled — this is still an extremely strong level of demand,” Bank of Montreal Economist Robert Kavcic told CBC News. “Home sales have backed off extreme levels seen in recent months, but demand is still historically strong and driving strong price growth. We believe that sales activity will continue to gradually cool in the year ahead, but it’s going to take higher interest rates to soften the market in a meaningful way.”1

So what can we expect from Canadian real estate? Here are five factors that illustrate where the housing market is today and is likely heading tomorrow.

 

HOME PRICE INCREASES MAY LEVEL OFF NEXT YEAR

The Canadian Real Estate Association predicts the national average home price will reach $677,774 by the end of 2021, which would be a 19.3% increase over last year. “While market conditions have eased a little in recent months, they nonetheless continue to favour sellers to some extent in virtually all local markets,” the association says.2

But for the remainder of 2021 and into 2022, the association anticipates pricing trends will head toward more normal territory. “Limited supply and higher prices are expected to tap the brakes on activity in 2022 compared to 2021,” according to the association.2

That translates into the association’s forecast of only a 0.6% uptick, to $681,500, in the national average home price for 2022.2 If that happens, it could prompt some buyers who had been reluctant to make purchases this year to enter the market next year.

What does it mean for you?

If you’re a homeowner, now might be the time to look at selling. That’s because the number of available homes continues to be relatively low, and price appreciation has begun to slow. We can help you prepare and market your home to take advantage of the current seller’s market.

 

HOME SALES ARE TAPERING OFF

If the 2021 home market in Canada is a wildfire, then 2022 could be more like a campfire. The Canadian Real Estate Association anticipates a slowdown in home sales activity in 2022 following an extremely busy 2021.3

An estimated 682,900 properties are expected to trade hands through Canadian Multiple Listing Service systems in 2021, which would be an increase of 23.8% from 2020, the association says.3

Next year is shaping up to be much less active, with national home sales forecast to decline 13% to around 594,000 properties in 2022.3

“This easing trend is expected to play out across Canada,” the association says, “with buyers facing both higher prices and a lack of available supply, while at the same time the urgency to purchase a home base to ride out the pandemic continues to fade alongside the virus itself.”3

The “easing trend” is already happening. Across the country, a record-high 69,702 homes were sold in March. But just a month later, the national number of homes sold slipped 12.5% to 60,967. ⁴ Home sales volume dropped another 7.4% in May to 56,156. ⁵

“One of the world’s [most active] housing markets appears to be slowing down,” the Bloomberg news service proclaimed in June in a report about the Canadian home market. ⁶

What does it mean for you?

Are you struggling to buy a home in today’s highly competitive market? If so, 2022 might be a good time to pursue a purchase because you may face less competition. However, one drawback of waiting is that mortgage rates are expected to go up. We can help put you on the right path toward homeownership, whether you want to buy now or next year.

 

SUPPLY OF HOMES REMAINS LOW

The housing shortage in Canada persists.

Before the pandemic, the number of available homes nationally sat at a 14-year low and the number of months of inventory had fallen below four months, according to the Canadian Real Estate Association.3

Inventory below four months puts the supply in “seller’s market territory,” the association says.3 Inventory refers to the number of months it would take for the current supply of homes on the market to be sold at the existing pace.⁷

In June, the Canadian Real Estate Association reported the national inventory of available homes was close to two months, reflecting an “unprecedented imbalance of supply and demand.”3 National inventory hit a record low of 1.7 months in March, compared with the long-term average of more than five months. ⁷

“At a time where so many markets are struggling with historically low inventory, sales activity depends on a steady stream of new listings each month,” the association says. ⁷

What does it mean for you?

A tight supply of available homes puts sellers in a strong position as long as demand stays high. So, if you’re a homeowner, placing your home on the market when demand exceeds supply could bring you a higher price. We can help you figure out when to sell so that you extract the maximum value from your home.

 

HOME CONSTRUCTION ON THE VERGE OF STABILIZING

Newly built homes add, of course, to the supply of homes available to buyers. And it appears that home construction in Canada is on the upswing. ⁸

For all of 2021, construction is projected to begin on as many as 230,000 new homes in Canada, up from a little over 217,800 in 2020, according to the Canada Mortgage and Housing Corp. (CMHC). Even more homes could get underway in 2022 (as many as 234,500) and 2023 (231,900). ⁸

“Housing starts will stabilize at levels consistent with household formation by the end of 2023,” according to CMHC. ⁹

What does it mean for you?

More newly built homes coming on the market could mean an opportunity for buyers, as construction boosts the supply of available properties and eases the strain on demand. Bottom line: An influx of new homes may open more doors to homeownership. We can give you a hand in locating a new or existing home that fits your budget and your needs.

 

MORTGAGE RATES ARE SET TO RISE

Low mortgage interest rates help entice buyers to make a home purchase. That’s certainly been the case in Canada in recent months. However, mortgage rates are poised to creep up this year and next year, and even into 2023.10

An analysis from Mortgage Sandbox indicates five-year Canadian mortgage rates are expected to remain low by historical standards, but they are expected to continue rising in 2022 and 2023. The analysis indicates the fixed rate for a five-year mortgage could climb to 3% in the third quarter of 2022. ¹¹

Low mortgage rates typically make it easier for homebuyers to qualify for a mortgage, as well. But on June 1, the Office of the Superintendent of Financial Institutions raised the mortgage “stress test” qualifying rate from 4.79% to 5.25%.12

According to the Toronto Sun, “It was intended in part to slow down the overheated housing market and likely in part because inflation (and higher interest rates) is on the horizon.”12

In a recent report, the British Columbia Real Estate Association forecast, “rising Canadian inflation — and the extent to which that inflation is a temporary phenomenon — is set to shape how rates evolve over the next year.”13

What does it mean for you?

Given the prospect that Canadian mortgage rates may go up during the rest of this year and into 2022, now might be the right time to think about borrowing money to buy a home. When interest rates rise, you pay more to borrow money. Whether you’re buying a new home or up for a renewal, you can lower your risk by locking in a fixed-rate rather than variable-rate mortgage.

 

 ARE YOU THINKING OF BUYING OR SELLING?

It can be tough to sort out the Canadian housing market—where are home prices heading, are mortgage rates going up, is it the right time to buy or sell? We can help you answer all those questions, and more. We then can work with you to come up with a plan tailored to your unique situation. Let us be your partner in the homebuying or home-selling journey.

 

 

 

 

Sources:

  1. CBC –
    https://www.cbc.ca/news/business/crea-june-stats-1.6103715
  2. Canadian Real Estate Association –
    https://www.crea.ca/housing-market-stats/quarterly-forecasts/
  3. Canadian Real Estate Association – https://www.creacafe.ca/quarterly-forecast-housing-activity-to-continue-easing-over-second-half-of-2021-and-into-2022/
  4. Global News –
    https://globalnews.ca/news/7868251/canada-home-sales-down-april/
  5. Global News –
    https://globalnews.ca/news/7950863/canada-home-sales-may-crea/
  6. Bloomberg – https://www.bloomberg.com/news/articles/2021-06-15/canada-housing-worlds-second-bubbliest-market-starts-to-look-fatigued
  7. Canadian Real Estate Association –
    https://creastats.crea.ca/en-CA/
  8. Canada Mortgage and Housing Corp. – https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/market-reports/housing-market/housing-market-outlook/2021/housing-market-outlook-61500-spring-2021-en.pdf
  9. Canada Mortgage and Housing Corp. – https://www.cmhc-schl.gc.ca/en/blog/2021/housing-markets-expected-moderate-risks-remain
  10. Global News –
    https://globalnews.ca/news/7962282/rising-interest-rates-canadas-housing-market/
  11. Mortgage Sandbox –
    https://www.mortgagesandbox.com/mortgage-interest-rate-forecast
  12. Toronto Sun –
    https://torontosun.com/opinion/columnists/wild-new-stress-test-rate-makes-it-more-difficult-for-home-buyers-to-qualify-for-mortgage
  13. British Columbia Real Estate Association – https://www.bcrea.bc.ca/wp-content/uploads/mortgagerateforecast.pdf

 

 

Posted by Christine Pecharich in Blog Posts
Lowest Mortgage Rates in History: What It Means for Homeowners and Buyers

Lowest Mortgage Rates in History: What It Means for Homeowners and Buyers

The interest rate on Canada’s most popular mortgage, the five-year fixed rate, has fallen to its lowest level in history. In early June, HSBC made headlines when it began offering Canadians a five-year fixed-rate mortgage below 2%. Multiple brokers followed suit, and some are now advertising even lower rates.1 And while many Canadians have rushed to take advantage of this unprecedented opportunity, others question the hype. Are today’s mortgage rates really a bargain?

While discounted five-year fixed mortgage rates have hovered between 2% and 4% for the past decade, they haven’t always been so low.2 For a period of 18 years, from 1973 to 1991, the posted five-year mortgage rate never fell below 10%. At the time, the Bank of Canada was hiking interest rates to try to stem a rising tide of inflation. It’s hard to imagine now, but the five-year fixed rate peaked at over 21% in 1981.3 Fortunately for home buyers, inflation began to normalize soon after, sending mortgage rates on a downward trajectory that has helped make homeownership more affordable for millions of Canadians.

So what’s causing today’s five-year fixed rates to sink to unprecedented lows? Economic uncertainty.

Fixed mortgage rates move in sync with the yield offered on government-backed bonds.4 As the coronavirus pandemic continues to dampen the economy and inject volatility into the stock market, a growing number of investors are shifting their money into low-risk bonds. This increased demand has driven bond yields—and mortgage rates—down.1

Quantitative easing measures taken by the Bank of Canada are also helping to bring down mortgage rates. The federal bank dropped its overnight lending rate to .25%, and it continues to inject billions of dollars into the economy, giving financial institutions the confidence and ability to continue lending.1

 HOW LOW COULD MORTGAGE RATES GO?

No one can say with certainty how low mortgage rates will fall or when they will rise again. But the Bank of Canada has signalled its commitment to keeping the policy rate at its effective lower bound of .25% for the foreseeable future, and many economists expect it to remain there through 2022.4

The real estate technology firm Mortgage Sandbox compiled forecast data from Bank of Montreal, Central 1, Desjardins, National Bank, Royal Bank, Scotiabank, and TD Bank. According to their analysis, the consensus was that the fixed 5-year mortgage rate will rise modestly over the next two years, averaging between 2.3% and 2.88%.5

While forecasts may differ, many experts agree: Those who wait to take advantage of these unprecedented rates could miss out on the deal of a lifetime. Positive news about a vaccine or a faster-than-expected economic recovery could send rates back up to pre-pandemic levels.

  SHOULD I CONSIDER BREAKING MY CURRENT MORTGAGE?

If you have a variable rate or recently renewed your mortgage, you may already be enjoying the benefits of falling interest rates. But if you’re locked into a higher fixed-rate mortgage for the next several years, you’re probably wondering if it’s a good idea to refinance.

Reduced interest rates can save homeowners a bundle on both monthly payments and interest over the term of a mortgage. The chart below illustrates the potential savings when you decrease your mortgage rate by just one percentage point. When it comes to refinancing, the bigger the spread, the greater the potential savings.

 Estimated Monthly Payment On 5-Year Fixed-Rate Mortgage

25-Year Amortization 

Loan Amount 3.5% 2.5% Monthly Savings Interest Savings Over 5 Years
$100,000 $499 $448 $51 $4,720
$200,000 $999 $896 $103 $9,441
$300,000 $1498 $1,344 $154 $14,161
$400,000 $1,997 $1,792 $205 $18,881
$500,000 $2,496 $2,240 $256 $23,601

Of course, you’ll need to factor in prepayment penalties and any fees associated with your new mortgage. In some cases, these can cost as much as 4% of the mortgage amount.6 You can use an online refinance calculator to estimate your potential savings, or we’d be happy to connect you with a mortgage professional in our network who can help you decide if refinancing is a good option for you.

 HOW DO LOW MORTGAGE RATES BENEFIT HOME BUYERS?

We’ve already shown how low rates can save you money on your mortgage payments. But if you can meet the mortgage stress-test requirements,* they can also give a boost to your budget by increasing your purchasing power.

For example, imagine you have a budget of $1,500 to put toward your monthly mortgage payment. If you take out a 5-year fixed-rate mortgage at 4.0% amortized over 25 years, you can afford a loan of $285,000.

Now let’s assume the mortgage rate falls to 3.0%. At that rate, you can afford to borrow $317,000 while still keeping the same $1,500 monthly payment. That’s a budget increase of $32,000!

If the rate falls even further to 2.0%, you can afford to borrow $354,000 and still pay the same $1,500 each month. That’s $69,000 over your original budget! All because the interest rate fell by two percentage points. If you’ve been priced out of the market before, today’s low rates may put you in a better position to afford your dream home.

On the other hand, rising mortgages rates will erode your purchasing power. Wait to buy, and you may have to settle for a smaller home in a less-desirable neighbourhood. So if you’re planning to move, don’t miss out on the phenomenal discount you can get with today’s historically-low rates.

(*This scenario assumes you can meet the current mortgage stress-test requirements.)

 HOW CAN I SECURE THE BEST AVAILABLE MORTGAGE RATE?

The best mortgage rates are typically reserved for only highly-qualified borrowers. So what steps can you take to secure the lowest possible rate?

    1. Consider a Variable-Rate Mortgage

 If you’re looking for the lowest rate possible, and you don’t mind the added risk, a five-year variable mortgage may be right for you. Even though the prime rate has held steady at 2.45% since April 10, lenders are gradually increasing their discount rates.1 And interest rates are expected to remain low at least through next year.

    2. Opt for a Closed Mortgage

 Closed mortgages usually come with hefty penalties if you opt to prepay or refinance your mortgage before the term ends. However, they offer lower interest rates than convertible or open mortgages. It’s important to note that not all closed mortgages are created equal. Before you commit, make sure you understand exactly how much you’ll be expected to pay should you need to break your mortgage mid-term.

    3. Give Your Credit Score a Boost

You may have heard that the Canadian Mortgage and Housing Corporation has raised its minimum credit score requirement from 600 to 680. And while there are plenty of banks willing to lend to borrowers with a lower score, their best rates go to those with excellent credit. Unfortunately, there’s no fast fix for bad credit, but you can take steps to give your score a boost before you apply for a loan:7

  • Dispute inaccuracies on your credit report.
  • Pay off debt, or spread it across multiple credit facilities.
  • Charge small amounts and then quickly pay off any dormant credit cards.
  • To lower your utilization rate, pay your credit card bill before the statement date

     4. Make a Large Down Payment

 You may be surprised to learn that the lowest advertised rates often go to insured borrowers who put down less than 20%. That’s because these “high-ratio borrowers” must pay for mortgage default insurance, which protects the lender from any financial loss. So while “conventional borrowers” who make a down payment of 20% may be charged a slightly higher interest rate, their total borrowing costs are lower because they don’t have to pay for mortgage default insurance.8 A down payment larger than 20% can bring down borrowing costs even further.

    5. Shop Around

 Rates, terms, and fees can vary widely amongst lenders, so do your homework. If you’re renewing an existing mortgage, start with your current lender. Then contact several others to find out which one is willing to offer you the best overall deal. But be sure to complete the process within 45 days—or else the credit inquiries by multiple mortgage companies could have a negative impact on your credit score.9

READY TO TAKE ADVANTAGE OF THE LOWEST MORTGAGE RATES IN HISTORY?

 

 

Mortgage rates have never been this low. Don’t miss out on your chance to lock in a great rate on a new home or refinance your existing mortgage. Either way, we can help.

 

We’d be happy to connect you with the most trusted mortgage professionals in our network. And if you’re ready to start shopping for a new home, we’d love to assist you with your search—all at no cost to you! Contact us today to schedule a free consultation.

The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.

 

Sources:

  1. Canadian Mortgage Trends –
    https://www.canadianmortgagetrends.com/2020/06/mortgage-rates-keep-setting-new-record-lows/
  2. Rate Hub –
    https://www.ratehub.ca/5-year-fixed-mortgage-rate-history
  3. The Globe and Mail –
    https://www.theglobeandmail.com/real-estate/the-market/remember-when-what-have-we-learned-from-80s-interest-rates/article24398735/
  4. Canadian Mortgage Trends –
    https://www.canadianmortgagetrends.com/2020/07/bank-of-canada-hints-at-no-interest-rate-hikes-until-2023/
  5. Mortgage Sandbox –
    https://www.mortgagesandbox.com/mortgage-interest-rate-forecast
  6. Financial Post –
    https://business.financialpost.com/moneywise/with-mortgage-rates-bottomed-out-its-time-for-homeowners-to-take-advantage
  7. Canadian Mortgage Trends –
    https://www.canadianmortgagetrends.com/2020/02/five-tips-increase-credit-score-quickly/
  8. Integrated Mortgage Planners –
    https://www.integratedmortgageplanners.com/blog/first-time-home-buyers/canadian-mortgage-rates-explained-why-a-smaller-down-payment-comes-with-a-lower-mortgage-rate-tuesday-morning-interest-rate-update-may-23-2017/
  9. Equifax –
    https://www.consumer.equifax.ca/personal/education/credit-report/understanding-hard-inquiries-on-credit-report/

Posted by Christine Pecharich