It didn’t take long for the impact of rising rates to hit the market. People rushed to lenders Thursday to lock in contracts and get pre-approved mortgages after the Bank of Canada raised its overnight lending rate the day before.
While the short-term impact of rising rates usually means a temporary buzz of sales activity, the larger concern is what two hikes in the overnight lending rate in two months – another one is possible in October – will do to a housing industry that has seen its largest market in the Toronto area already under siege from provincial rule changes that targeted investors and foreign buyers.
On the horizon in terms of tighter credit regulations is a new rule from the Office of the Superintendent of Financial Institutions that would target home buyers with down payments of more than 20 per cent with a tough new stress test: they would have to qualify based on a rate 200 basis points above their contract.
“It could be the biggest rule change of all-time,” said Rob McLister, the founder of ratespy.com. The housing market has already been adjusting to changes in the insured market, instituted in 2016, which forced homeowners with less than a 20 per cent downpayment to qualify based on the Bank of Canada five-year qualifying rate as opposed to the one on their contract. That rate is now 4.84 per cent.
All these changes come as the Toronto housing market continues to show no signs of stopping its free fall which started after the province instituted 16 changes to cool the market, including extending rent control across Ontario and a 15 per cent non-resident speculation tax in the Greater Golden Horseshoe area.
The Toronto Real Estate Board reported this week that August sales in the region were down almost 35 per cent from a year ago while prices are off more than 20 per cent from the peak reached before the tax. All those foreign buyers, if they weren’t scared away by tax, might also be retreating because the Canadian dollar has risen about 14 per cent against the greenback since a May low — a key factor since many foreigners hold their money in United States currency.
“What I worry about is there is a series of policies and programs being implemented by governments at different levels and they are not necessarily co-ordinated,” said Brad Henderson, chief executive of Sotheby’s International Realty Canada. “Any of them can have an effect on the market but all of them together can have a very significant and unintended consequence.”
About a quarter of those with mortgages have rates tied to prime, so they are being immediately impacted by any increase in the overnight lending rate which prime tends to track. Most financial institutions had raised their prime rate by 3.2 per cent Thursday after it had been as low as 2.7 per cent two months ago.
Discounting is still a major factor, as lenders compete for an ever-shrinking market because of falling sales and prices and McLister says the best variable rate from brokers, who buy down their rate by eating into their commission is still 2.14 per cent if the loan is backed by Ottawa. The best variable rate deal from banks is 2.55 per cent, he said.
Consumers are also soon going to be hit by increasing rates on long-term mortgages which are priced based on government of Canada bond yields. The best five-year fixed rate from a broker for an insured mortgage is now 2.48 per cent and a typical discretionary five-year bank rate is up to 3.04 per cent.
“There is a delay in lenders (passing on increases) for five-year money. Lenders are seeing a slowing market and are trying to load the pipeline in advance,” said McLister.For now, it appears consumers have jumped into the market to beat the latest rate increases, said Bill Whyte, senior vice-president with Ontario credit union Meridian. “It take a couple of days for things to move through on mortgages so that drives a little bit of input. We were quite busy,” said Whyte, who does believe market can withstand the rate increases and the tougher lending rules.
Benjamin Tal, deputy chief economist, has lobbied against the latest OSFI changes to the uninsured market because he thinks it’s just too much for the real estate sector to absorb. “They are getting a lot of feedback from the industry. I wouldn’t be surprised given the increase in rates and the slowing in Toronto, that we might see them not change but postponing the change,” said the economist.