Despite national average home values zooming 38.4% in just 12 months, it could be a lot worse for young buyers if it weren’t for one thing: interest rates staying ultra-cheap.
The lowest borrowing costs in history have helped drive up prices, no doubt. But buying a house would be even less “affordable”—if you want to call it that—if rates were rising.
Or, should we say, when rates start rising.
The Bank of Canada holds the key
Much could change once our trusty central bank starts its rate hike cycle. That’s slated to happen next year.
What's more, investors are increasingly betting that the BoC’s key lending rate will surpass the peak reached of the previous rate-hike cycle (which was 1.75%). Swap markets are forecasting the BoC will raise its overnight target rate—currently at a record-low of 0.25%—up to 2% over the next five years.
The last time interest rates were above 2% was back in 2008, amid the Global Financial Crisis.
Rates are based on a home value of $400,000
What Could a Rate Boost do to Canada’s Hot Housing market?
Continued low rates are a “powerful force” keeping affordability from deteriorating even more, Charles St-Arnaud, Alberta Central’s chief economist wrote in a recent analysis.
It won’t take a large increase in interest rates to have a serious impact on financing accessibility, he says. Higher monthly carrying costs will pressure family budgets and a tougher government "stress test" will lower maximum loan amounts, taking some wind out of buyers' sails.
“A 150-bps increase in mortgage rates could be enough to generate significant headwinds on some housing markets and house prices,” he says. Some regions could be forced into “overvalued territory” with as little as 100 bps of tightening, he writes.
What would happen in that case? According to a new report from Moody’s Analytics, “The combination of restricted mortgage lending and the expectation of higher mortgage rates suggests that house prices are likely to experience a slowdown in the next year and a half,” it says (thus improving affordability).
“Affordability as measured by the ratio of median dwelling price to median family income” is already at a record low, the credit rating firm writes, “making it difficult for house prices to maintain the same momentum as before.”
Moody’s adds that the pace of new construction is also likely to decline in late 2021 and into 2022 as the housing market “comes under pressure” from rising interest rates.
“House prices are sure to correct,” Moody’s forewarns. “It is a matter of when, not if.” But not before they rise further, it predicts.
If all of this sounds like a bunch of noise, it may well be. As CMHC learned the hard way with its fateful 2020 predictions, not even the best-informed housing analysts this country has to offer have a window into the future.
