According to Canada’s national housing agency, much smaller mortgages are set to become the norm in this country. The Canada Mortgage and Housing Corporation (CMHC) is this month forecasting numbers that include projections for mortgage rates. High projections included within them suggest the rates would add almost 1/5th to the cost of servicing a mortgage. Should those projections come to be reality, buyers would lose up to 11% of their max mortgage size over the course of the next two years.
The connection between mortgage qualification and the quantity and types of buyers in the home buying market is easy to make. Purchasing power goes a long way in determining the clients real estate agents are able to secure. These market projections pair with many others to reinforce the conclusion most realtors in Canada have already made; it’s increasingly difficult to generate new clients as reliably as they’d like.
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The New Realities
The focus is on the CMHC mortgage rate projections, and how they’ll impact the average household. The Crown Corp uses 5-year fixed terms, and they’re run against a 30-year amortization. Stress testing isn’t incorporated in these findings, rather the look is at the pure impact of rates on households with consistent earning over 3 years.
The 5-year mortgage rate is forecasted to rise nearly 22%, according to the CMHC, with
interest rates ‘normalizing’ as they put it. Analysts have a high forecast of 5.6% in 2018, 6.2% in 2019, and 6.5% in 2020. As of now the 5-year posted Bank of Canada rate is only 5.34%, and it’s easy to see the huge reduction in buying power that will be a product of that. Too be ceratin, the 21.72% increase in rates from today to 2020 will have a serious impact on buying power.
History of 5-Year Fixed Mortgage Rates:
- 1980 – 15.4%
- 1985 – 10.4%
- 1990 – 9.9%
- 1995 – 7.4%
- 2000 – 7.6%
- 2005 – 6.2%
- 2010 – 5.1%
- 2015 – 4.9%
- 2020 – PROJECTED – 6.5%
The 11% Reduction
Homebuyers in 2020 can expect to be paying a lot more interest, and encountering a reduction in the size of principal that can be borrowed. If rates hit their forecast, the max mortgage for a household in 2019 would be 8.7% down from one earning the same today. By 2020, it would be 11.69% lower than a household generating the same income today. The increase in rates promise to bring a big potential loss in buying power.
The impact of the rate increase skews to markets with heavy debt-to-income ratios. Markets like Toronto and Vancouver, obviously, are ones that meet the criteria there and will feel this pinch most pronouncedly. Reduced liquidity will likely be the new reality. Cities like Ottawa and Calgary have very high incomes and relatively cheap housing, so these markets are more likely to handle the hikes more effectively and maintain buyer purchasing power to a greater extent.
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