The average price of a Toronto home has surpassed the $1 million mark for the first time ever, amid a pandemic no less.
And now, we’ve got a situation where not only are home prices rising, but mortgage rates as well.
Could this be the straw that breaks homebuyers’ backs?
Some of the biggest real estate boards dropped fresh new February stats on us this week. Prices have shown no signs of easing thus far.
"Low interest rates remain a key driver in today's market,'' Real Estate Board of Greater Vancouver chair Colette Gerber in a release. "We're seeing steady numbers of first-time homebuyers and move-up buyers entering the market.''
But mortgage rates are now materially higher than they were just weeks ago, with nearly all non-bank lenders and most of the Big 6 banks having hiked fixed rates by up to 30 basis points.
That’s something to watch because historically low interest rates have somewhat blunted the impact of rising home prices over the past year. But now, that could stop and affordability constraints could get real, real soon.
Continued increases would almost certainly start to put the squeeze on the most indebted 10-20% of homebuyers, particularly if we see a rise in the mortgage qualifying rate, a.k.a. the stress test rate.
A huge wildcard for borrowers would be the threat of yet more mortgage regulation (the dreaded “R” word).
Restricting people’s ability to qualify for a mortgage is probably the fastest way to knock home values off their perch.
But would regulators actually try to prick the housing balloon amid a nascent and fragile economic recovery? We wouldn’t put it past them.
“Odds of policy intervention increase the hotter markets get,” reported RBC Economics this week. “…Policy-makers come under intense pressure to stabilize markets and contain household leverage risks when prices spiral upward.”
While there’s been no hint of that so far, previous run-ups in home prices have precipitated the introduction of new mortgage rules on multiple occasions. That was the case in 2017, for example. During a similarly overheated market, the Office of the Superintendent of Financial Institutions (OSFI) announced the stress test for uninsured mortgages, along with a boatload of other underwriting rules.
And after the run-up in early 2016, OSFI announced stricter capital requirements in April of that year, which eventually drove up the cost of default insurance big time. That was followed by major new restrictions on mortgage insurance in October 2016.
So, could the feds rain on the homebuying parade again? You bet your sweet bippy.