There have been warnings from economists all across the country that interest rate hikes are going to occur again here in Canada, and they’re going to occur because they need to occur to combat inflation along with more simply getting into line with what rates should be. Long story short they’ve been kept artificially low for a very long time, and while there were reasons for that type of regulation the fact is that the economy can’t be geared for pandemic recovery forever.
Now to be fair, the majority of homeowners in Canada have been smart about buying the home they did, and most of those same people have managed their personal finances in a way that has let them move towards ownership of the home by being able to afford their mortgage and still have the lifestyle they’ve envisioned for yourself. Some may say that in many cases good fortune helped them do that, but to be fair there are a lot of older homeowners who bought their homes in the early 80s when 18% mortgages were the norm.
Will this mean more homes are going to go onto the market? Nearly certainly, but not so certain is whether or not that will be a huge plus for anyone working as a real estate agent. It is always a competitive business and more homes going onto the market won’t necessarily mean an uptick business for any one realtor. What likely will though is use of our online real estate lead generator here at Real Estate Leads. It is proven for helping you be directly in touch with people who are ready to make a move in the real estate market.
Let’s stay on topic though and look at the what the potential fallout of more interest rate hikes as it relates to homeowners making decisions about whether they can afford their homes anymore.
Shades of Early ‘80s
Regarding those 18% mortgages in the 80s, here we are roughly 40 years later with another incompetent Trudeau printing money to the long-term detriment of the economy. But we won’t digress into that, and will only say there are always very real consequences to bad monetary policy when it occurs at the Federal level. While interest rate increases aren’t attributable to that, the severity of their affects on the average Canadian’s budget very much are and some homeowners are about to find they’re that much more over-leveraged with the home they recently bought.
An online survey conducted by Manulife Canada between April 14 and April 20 of this year found that just under 20% of homeowners polled are already at a stage where they’re realizing their home is unaffordable for them, even if they’re currently living in it and managing to make the mortgage payments – for now. That’s because Nearly 1 in 4 homeowners are foreseeing no choice but to sell their home if interest rates go up further.
And that is in the process of happening, with the BoC overnight rate rising by half a percentage point to 1.5% on June 2, and in the response to that more than 1 in 5 Canadians expect rising interest rates to be detrimental with the impact on their overall mortgage as well as debt and financial situation.
Many are in that reality right now, with the three hikes seen so far this year having a significant impact on their household’s monthly cash flow. To give you an idea here, one that had been budgeting $2,600 a month on variable rate mortgage at the start of 2022 would be paying about $400 a month more now as result of the rates rising 125 basis points so far.
Financially Unmanageable
That is a serious amount of money, and it is not the type of quantity that can be made up for by cutting corners elsewhere. This is all an outgrowth of how over the last two or three years, very low interest rates have encouraged many Canadians to take higher mortgages. Unfortunately the same truth as always applies – you need to have a very firm idea of what you can afford, and especially considering that most people will have been advised of the potential repercussions of rising rates.
In fairness, this is something that a good realtor will take the initiative in making their clients understand long before they start making offers on properties. Yes, there is a mortgage stress test and it’s become much more stringent recently. But obviously there are buyers who passed it when in reality they should have had the common sense to pass on homes they can’t afford.
Wave of New Listings?
This creates an age-old situation where some stand to benefit at the detriment of others, and of course with more housing supply available there will be real benefits for people who haven’t been able to get into the housing market so far. But some homeowners will stand to lose their home, and even though that may be in large part their own doing it’s not something anyone should be happy about.
There is a belief that most homeowners should be insulated from a rapid rise in interest rates thanks to that federal mortgage stress test but many of them working with some credit unions or private lenders could be exempt. In these scenarios they may be qualifying for a mortgage rate of either 5.25% or two percentage points higher than their actual rate, whichever is higher.
The reality now is that Canadians who rushed into the housing market during the pandemic on the promise of low mortgage rates at or below 2% should be very clear on the fact that the time to renew is fast approaching with rates around 4% now the norm. This has the potential to double their monthly payments, and of course many simply won’t be able to afford that unless they find some way to drastically increase their income and do it quickly.
1st-time homebuyers who jumped into real estate during the pandemic will likely see these rates rising for the first time and it definitely could be a wake-up call or even a cause for buyer’s remorse. Experts suggest those who are thinking to buy a home and haven’t done so already should ask mortgage advisors about what they should expect for the next three to five years.
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