Analysis: Bank of Canada’s rapid take-off warning could curb property boom fueled by speculators

Rainbow appears in front of a condominium building in Toronto, Ontario, Canada, October 16, 2021. REUTERS / Chris Helgren

TORONTO, Oct.29 (Reuters) – Canada’s pandemic housing boom has drawn a larger-than-usual share of speculators, many of whom have taken advantage of falling variable mortgage rates to take out several loans, but the surprise warning from the central bank this week on an early take-off in interest rates could quell a recovery fueled by cheap debt.

Earlier and faster rate hikes could trigger higher payments for many of these buyers, and investors with multiple properties could respond by selling some of them at falling demand if their commitments become too onerous.

Already, the housing market has started to cool as fixed-rate mortgages have risen 60 basis points on average this year, according to, following rising bond yields. On Wednesday, the Bank of Canada said it could raise its benchmark interest rate from the current 0.25% as early as April, three months earlier than expected. Read more

Money markets are expecting a rate hike in March, with nearly 100 basis points of tightening in 2022.

“People living in their homes are a much more stable source of demand; investor demand is much more volatile, ”said Philip Cross, senior researcher at the Macdonald-Laurier Institute.

“Once (investors) start to see that rising interest rates and / or falling house prices make housing speculation as an investment unprofitable, that source of demand can go away pretty quickly. . “

Investors accounted for a quarter of all home purchases in August in Ontario, Canada’s most populous province, the highest in at least a decade, according to Teranet, highlighting the heightened risk of the current real estate cycle. They were the largest group of buyers, a marked change from 2011, when they were the smallest.

The number of people with three or more active mortgages increased 7.7% in the second quarter from a year ago, double the rate before the pandemic, according to Equifax Canada.


Record rates have ignited demand for housing, pushing some Canadian cities and their surrounding areas into bubble territory. The 11% rise in house prices in Canada in 2020 was the fourth highest in an International Monetary Fund real estate index of 60 countries. Home prices have risen another 14% this year, according to the Teranet-National Bank Composite House Price Index.

Swiss bank UBS ranked Toronto # 2, behind Frankfurt, in this year’s Global Real Estate Bubble index, with Vancouver at # 6.

The market is showing signs of easing. The Teranet-National Bank index rose 0.1% in September compared to August, the fourth consecutive month in which growth slowed compared to the previous month. Read more

Granted, few anticipate a general market crash as a shortage of inventory and a new surge in immigration are expected to keep prices bottoming, mortgage broker Ron Butler said. A stress test, which ensures borrowers can make payments at a rate of at least 5.25%, he added. Read more

Former central bank governor David Dodge also ruled out the likelihood of a big correction.

“There might be people who made a stupid bet that they could borrow money for nothing forever,” Dodge told Reuters on Thursday. “I don’t have a lot of sympathy, and I don’t think there are a lot of people like that.”

The spike in investor interest has contributed to an increase in borrowing against existing properties. Homeowners can pay the down payment on their next property with Home Equity Lines of Credit (HELOC), borrowing up to 65% of the appraised value of the existing home, at an interest rate above fixed rates and variables.

New HELOC volumes were up 57% in the second quarter from a year ago, a “worrying” trend as repayments are often subject to variable interest rates, according to Equifax Canada.

Variable-rate mortgages made up 54% of new home loans overall in August, down from just 26% a year earlier, according to Bank of Canada data.

For investors in adjustable rate mortgages, “a rise in rates will eat away at cash flow,” which may already be falling short of expenses, said John Pasalis, president of brokerage and research firm Realosophy Realty. “We could see some investors start to get rid of the properties,” if they are faced with a cash shortage, he added.

A moderate setback may not be a bad thing, given the harsh conditions in major Canadian cities, he said.

“This time next year, the hope is that we start moving towards a more balanced market, where there are more stocks and where investor demand is hopefully declining,” he said. .

Reporting by Nichola Saminather; Additional reporting by Julie Gordon and Steve Scherer; Editing by Denny Thomas and Alistair Bell

Our standards: Thomson Reuters Trust Principles.

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