Making sense of the markets this week: December 11, 2022
“The Canadian economy grew more than expected in the third quarter, although weaker housing investment and consumer spending suggest higher interest rates are starting to take hold. Gross domestic product (GDP) rose 2.9% on an annualized basis from July to September, Statistics Canada reported Tuesday.
For my money, it was this stronger-than-expected third-quarter gross domestic product (GDP) reading that put the nail in the coffin of any hopes of a 25 basis point rise on Wednesday. The Canadian economy – and the real estate market – is proving to be more resilient than many would have imagined.
Moreover, the labor market is not booming. Of course, we need the economy to cool down to help fight inflation.
But, cracks are appearing in the housing market, and this week’s rise will now cause considerable stress for many recent buyers who have been stress-tested in 2021.
How Bad Are Variable Mortgage Rate Increases: They Just Passed the Stress Test
If you got an adjustable rate mortgage in 2021, the stress test was 5.25%, your actual rate was 1.45%.
Seemed impossible to reach 5.25%
After today’s increase, a good floating rate is 5.45%
— Ron Butler (@ronmortgageguy) December 7, 2022
What real estate expert and brokerage owner Ron Butler is suggesting in the tweet above is that homebuyers have been tested to make sure they can handle a rate that jumps to 5.25%. Many recent buyers have moved past this level of financial comfort. Research from the Bank of Canada shows that about half of all variable rate mortgages with fixed monthly payments have already reached trigger rates, which often means borrowers need to increase their monthly payments. Many more will now reach their trigger rate thanks to Wednesday’s move.
Bank of Canada Rate Hike Creates Wider Cracks in the Mortgage World: Effects on RE Prices
Apart from the obvious fact that variable mortgage borrowers are paying more and this is worrying, there are very specific situations that are getting worse
1) Mortgage renewals from alternative lenders
— Ron Butler (@ronmortgageguy) December 9, 2022
It gets scary in the real estate space. I follow a diverse group of real estate experts on Twitter and there are so many reports of recent buyers receiving letters and calls from their banks as they hit their trigger rate. (This is from Ratehub trigger rate explainer. Ratehub.ca and MoneySense.ca are both owned by Ratehub Inc.)
People who have purchased pre-construction homes and condos may not qualify for a mortgage when they become owners.
The bad news is that Canadians are rate sensitive. The good news is that we are rate sensitive and rate hikes should eventually do the trick.
When? Only the future knows.