What Makes The Mortgage Rates Go Up?
In the previous years, we have looked at market forces of supply and demand to predict and plan according to the direction of the housing market and rates trend.
2018 is different – It is more about anticipating the effects of the federal government’s unpredicted intervention, which often do not align to what is happening in reality. Due to overnight rate hikes by Bank of Canada, the Prime rate went up and 90% of our clients had to pay a higher monthly payment.
Bank of Canada says that the reason behind the Prime increase is the improved economy, more employment, and a stable inflation level. But, is this what we, and our clients, really experience? I’m not sure. I know that whenever I do my grocery shopping, I see prices creeping up. I see more and more big box stores closing. Overall, I’m not sure we are doing as well as the government reports.
New Mortgage Regulations
On top of the Prime rate going up, new regulations – which require the application of a “stress test” on all mortgage types – decreased the mortgage amount and created a stressed market. Add in to the mix both the increase of insurance premium (although fault levels are less than 1%) and the removal of mortgage bundling, and you get fixed mortgage rates that go up simultaneously with variable mortgage rates, with an increased demand for affordable housing.
The federal government reported 3% growth in economy during 2017. The government also pointed out that there may be difficulties in the establishing of new trade agreements between Canada and the US. Both trends of instance growth and trade problems have the potential to disturb the economy’s stability. This led the Bank of Canada to their decision to increase overnight rates to stabilize the situation and keep the growth at check with a slower pace of 2.2% in 2018. We will probably see more increases to the Prime rate during 2018. By saying this, variable rate mortgages are the most flexible and cheap financial tool to use in the oncoming year.
Increased mortgage rates and decreased mortgage sizes push the buyers to look for more affordable housing solutions. Since 2017, we see a high demand for smaller, more affordable houses, taking the condo market up. Condos and townhouses are sold above asking-price for cash offers (no subjects) with multiple competing offers. Condos pre-sales have been reaching an all-time high record.
The detached houses market behaves like a separate market in 2018. Although high-end house prices are high and stable, we see sales slowing down.Regular houses are selling well in Vancouver while in Toronto, prices dropped significantly. Buyers sit on the fence waiting to see how it will evolve. Sellers take their houses off the market and only those who have to sell do it for a reduced price. While detached houses in Greater Vancouver go slightly down, the more remote, surrounding areas are picking up. Again, it is all about affordable housing.
Millennials in the Housing Market
The high demand for smaller, affordable housing took condo prices up by 8.5%. This makes some of the most traditionally affordable houses cease to be affordable. We especially see Millennials struggling to enter the market and commit to a seemingly illogical debt with a higher mortgage rate that will only secure a small, urban home. Alternatively, they can aim for a reasonable house in a location that forces them to spend an hour on the road each morning. The lack of affordability results in increased demand for rentals, which pushes the rental prices higher and higher – again, out of reach.
Our thoughts are that it will be much tougher to go into the market by the end of 2018. Taking the time to accumulate a down payment is out of question because of a compromised lifestyle and the hike in housing prices. However, securing a down payment with a parent’s help is the most common solution these days. With higher prices and higher mortgage rates, Millennials are strongly advised to act now! There are strategic ways to get exactly what they want and need.
What Will Happen to Mortgage Rates in 2018?
From the beginning of 2018, mortgage rates went up and then slightly down with some lenders. Overall, we anticipate that both variable mortgage rates and fixed mortgage rates will go up in 2018. For most of our clients, that change won’t be as significant, as for every 100K in mortgage a 0.25% rate increase works out to only $13.00 more a month. On top of that, in order to balance the Prime going up, banks and lenders started offering a deeper discount of the prime rate, taking the variable mortgage rate back to a level of less than 3%.
We still see the variable mortgage rate as the best choice for our clients. Those who are sensitive to change are recommended to go for a fixed mortgage rate for a shorter term of 2 or 3 years. Taking all the above in consideration, it becomes more important than ever to tailor a mortgage product that minimizes your costs and increases your real estate gain.