Rate hike expected to affect affordability in many markets

by Jamie Henry | 25 Feb 2014

In its latest housing affordability report, the Royal Bank of Canada predicts interest rates will soon rise; putting housing affordability in many markets across the country in jeopardy. Should brokers expect an influx of business in the short-term?

“RBC anticipates that as longer-term interest rates begin to moderately rise, the costs of owning a home at market value will gradually outpace (growth) household incomes by late-2014, leading to strained affordability in several markets across Canada, much like the trend in Toronto,” RBC chief economist Craig Wright said in the report.

Brokers may not despair just yet, however, with homebuyers looking to take advantage of current low rates before the inevitable hikes. The report was published on the heels of a number of brokers and one credit union posting sub-three per cent five year fixed rates; marking record lows for the past six months.

Still, the Royal Bank predicts the overnight rate will remain at its long-standing one per cent for the rest of the year.

“While we expect the Bank of Canada to leave its overnight rate unchanged in 2014, we forecast an upward drift in bond yields-the main driver of fixed mortgage rates-ahead of what is likely to be a gradual pace of policy tightening by both the Fed and the Bank of Canada,” Wright said.

If the forecast proves correct, it will mark the greatest change in affordability since 2010.

“The relative strength in income gains in Canada offset the minor increase in homeownership costs in the final months of 2013, meaning that homes were more affordable for those looking to buy,” Craig Wright, senior vice-president and chief economist said in the report. “When you look at Canada’s year-on-year affordability trend, 2013 was little changed from 2012, and even from 2011 or 2010, for that matter.

“That being said, this stationary trend also means that a divergence still exists – owning a detached home at market value is more of a stretch for homebuyers than owning a condo.”
 

Fixed rates to remain low until 2015 spike

• by MBN | 10 Feb 2014
  
  The Canadian Mortgage and Housing Corporation is forecasting fixed-interest rates increases in 2014, though brokers can breathe a sigh of relief as rates are still expected to remain historically low.

  “According to CMHC’s base case scenario for 2014, the average for the one-year posted mortgage rate is forecast to be within 3.0 per cent to 3.50 per cent, while the average for the five-year posted mortgage rate is anticipated to be within 5.25 per cent to 5.75 per cent,” CMHC states in its first quarter 2014 housing outlook.

  And while interest rates are expected to eventually climb, the crown corporation believes low rates will allow the housing market to continue to thrive.

  “Consistent with a somewhat higher economic growth prospect, interest rates are forecast to register gradual and modest increases by the end of the forecast horizon, ultimately leading to a slight increase in mortgage rates,” the report states. “Nevertheless, this interest rate outlook will continue to support housing market activity over the forecast horizon, as mortgage rates will remain low by historical standards.”

  However, next year will see a slight spike in interest rates, with 2015’s average five-year fixed rate expected to hover between five and six per cent.

  “For 2015, the average for the one-year posted mortgage rate is expected to rise and be in the 3.75 per cent to 4.25 per cent range,” the report states. “While the average for the five-year posted mortgage rate is forecast to within 5.50 per cent to 6.25 per cent.”