Rising mortgage rates yet to put a dent in exuberant housing market as policymakers take note

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Mortgage rates are climbing across Canada, but even increased borrowing costs may not be enough to tame a raging market for residential real estate that is starting to catch the attention of policymakers.

Recent housing market activity has been “much stronger than expected,” the Bank of Canada said last week. Mortgage rates, meanwhile, remain relatively low, even as they’ve been ticking up lately.

“The moderate rise in interest rates we’ve seen, and the historically low rates that we have, isn’t deterring clients in any large fashion,” said Dan Eisner, chief executive of Calgary-based mortgage brokerage True North Mortgage Inc.

Canadian mortgage rates are increasing along with lenders’ funding costs, as government bond yields have recently been driven higher, in part because of expectations of a brighter economic outlook.

Fixed mortgage rates have climbed by about 40 basis points, or 0.4 per cent, since the start of the year, according to James Laird, co-founder of Ratehub.ca and president of mortgage brokerage CanWise Financial.

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More increases are expected, Laird said, to match the 50 to 60 basis-point move in bond yields. Usually this would spark a rush of borrowers trying to lock rates in before a lull in activity, he noted.

There may not be such a breather this time around, however, as COVID-19 has prompted many Canadians to rethink their housing situations and opt for more space. Moreover, the Bank of Canada’s five-year benchmark rate hasn’t budged from 4.79 per cent, meaning a key input of the “stress test” borrowers have to pass for a loan remains unchanged as well.

“I’m not sure if we’re going to see that lull,” Laird said in an interview. “Moving from record lows to still-low rates, even though that’s a move up, I don’t expect will be enough to offset the lifestyle changes that people are trying to make through housing.”

Moving from record lows to still-low rates … I don’t expect will be enough to offset the lifestyle changes that people are trying to make through housing

James Laird, co-founder Ratehub.ca

Canada’s housing market appears to have gotten off to a strong start this year.

National home sales set another all-time record in January, according to the Canadian Real Estate Association, while the actual national average sale price jumped 22.8 per cent from a year earlier. Meanwhile, Statistics Canada said the total value of building permits issued in January was a record high of nearly $10 billion, mostly because of the residential sector.

That ongoing demand is good for sellers and good for sectors of the economy that thrive in such conditions — “we need the growth we can get,” Bank of Canada Governor Tiff Macklem said last month. However, surging real estate prices aren’t as beloved by buyers struggling to get into the market or by policymakers concerned about debt levels, with even Macklem noting they are starting to see some signs of “excess exuberance.”

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“I think these signs are continuing,” Bank of Canada deputy governor Lawrence Schembri said last week. “It’s something we’re monitoring closely.”

A recent survey by online realtor Zoocasa found that 78 per cent of respondents felt the pandemic had caused suburban and small-town real estate prices to rise at unsustainable rates.

If home prices continue shooting up, even in spite of rising rates, some economists say it may force policy action, although exactly what governments or regulators would want to do at this moment remains to be seen.

“If Canadians are taking out permits and buying resales at such a pace during winter then what does that say when the key spring housing market and vaccines arrive?” wrote Derek Holt, head of capital markets economics at Bank of Nova Scotia, in a recent note to clients. “Policy is arguably overly easy and (macroprudential) changes may be afoot in a spring budget.”

Royal Bank of Canada economist Robert Hogue also noted in a recent report that the “odds of policy intervention increase the hotter markets get.”

“Events in British Columbia (2016) and Ontario (2017) have shown us policymakers come under intense pressure to stabilize markets and contain household leverage risks when prices spiral upward,” he added, referencing previous taxes imposed on foreign buyers in those two provinces in response to skyrocketing home prices.

There is already a policy being worked on in Ottawa that is similar to those measures. In its fall economic update, the federal Liberal government said it would “take steps over the coming year to implement a national, tax-based measure targeting the unproductive use of domestic housing that is owned by non-resident, non-Canadians, which removes these assets from the domestic housing supply.”

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Yet a federal foreign ownership tax may not really address what’s causing the housing market’s recent flurry of activity, which seems to be driven more by pandemic-related shifts in demand, low mortgage rates, limited supply and an increase in household savings.

“The challenge is always what sort of policy intervention would be effective, because often when we’re dealing with issues related to declining housing affordability, the government response is to implement policies that make it more affordable for buyers that can’t get into the market,” said Craig Alexander, chief economist at Deloitte Canada. “What ends up happening is you actually boost demand, which ultimately ends up maintaining the growth in prices.”

Alexander is also expecting to see listings increase as the pandemic is further reined in and vaccines are further rolled out. That could alleviate some of the concerns about supply, while rising interest rates could still tamp down a bit of demand.

“Rising fixed mortgage rates are not going to be enough to cause a market correction,” Alexander said, “but it should contribute to helping cool the market.”

Robert McLister, mortgage editor at Ratesdotca, said a 100-basis point spike in rates “would barely make a dent in home prices,” as that would suggest an improving economy with stronger employment and wages, helping drive demand for real estate.

Longer-term, rising rates are kryptonite for home prices, but only if the increases are significant

Robert McLister, mortgage editor, Ratesdotca

Something stronger, such as a 200 to 250-point surge in mortgage rates, would be a different story, he noted in an email.

“Buyers hear that rates are shooting higher and they rush to lock in pre-approvals and buy a home,” McLister added.

“Longer-term, rising rates are kryptonite for home prices, but only if the increases are significant.”

Financial Post

• Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne