Housing Market Remains Strong Despite Rising Mortgage Rates
Rising mortgage rates are currently climbing across Canada, yet the Canadian housing market remains remarkably robust, attracting the attention of government officials. Recent market activity has been “much stronger than expected,” according to the Bank of Canada, which revealed this assessment last week. Despite these increased borrowing costs, mortgage rates are still relatively low, though they have been edging upwards recently. This dynamic demonstrates a significant divergence within the housing sector, prompting discussion amongst policymakers.
The Bank of Canada’s assessment of the market highlights a key tension: mortgage rates, while increasing, haven’t yet triggered a substantial slowdown. This is largely attributed to the shift in consumer behavior and broader economic factors. As Dan Eisner, chief executive of Calgary-based mortgage brokerage True North Mortgage Inc., explained, “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.” This reflects a reality where demand is fueled by more than just interest rates; it’s intertwined with lifestyle changes, including a desire for larger homes and increased space – trends amplified by the COVID-19 pandemic.
The observed increases in fixed mortgage rates—approximately 40 basis points or 0.4 per cent—since the start of the year have been largely absorbed by James Laird, co-founder of Ratehub.ca and president of mortgage brokerage CanWise Financial. Laird noted that lender funding costs are rising alongside mortgage rates, driven by higher government bond yields reflecting an improved economic outlook. He anticipates further rate increases – typically 50 to 60 basis points – to match the movement in bond yields. However, he also pointed out the unusual circumstances, stating that a typical reaction to rising rates would involve a rush of borrowers seeking to secure rates before activity declines. The pandemic’s influence, with its shift towards a greater emphasis on space and suburban living, appears to be mitigating this traditional response.
The Canadian housing market has maintained momentum throughout the year, achieving record sales figures in January, according to the Canadian Real Estate Association. The national average sale price jumped by 22.8 per cent compared to the previous year. This surge in activity is also reflected in substantial building permit issuance, reaching nearly $10 billion in January, primarily driven by the residential sector. This sustained demand is beneficial for sellers and supports related industries. Bank of Canada Governor Tiff Macklem acknowledged this strong activity last month, noting that “we need the growth we can get.” However, this robust market is viewed with concern by policymakers who are monitoring “excess exuberance.”
The Bank of Canada’s deputy governor Lawrence Schembri confirmed that the central bank is closely monitoring the market’s activity. The Bank of Canada’s five-year benchmark rate remains fixed at 4.79 percent – the rate used in the stress test for borrowers – indicating that a key input for mortgage applicants is unchanged. This stability, combined with rising bond yields, creates a complex situation. Derek Holt, head of capital markets economics at Bank of Nova Scotia, highlighted this dilemma, questioning “what does that say when the key spring housing market and vaccines arrive?”. He suggested that policy intervention might be necessary if the market continues to escalate, prompting calls for potential changes to curb excessive growth.
Robert Hogue, a Royal Bank of Canada economist, echoed these concerns, stating that the chances of policy intervention increase as prices rise. He referenced previous interventions in British Columbia and Ontario in 2016 and 2017, respectively, when governments responded to rapid price increases. These actions included taxes targeting non-resident ownership. As of now, the potential implementation of a national tax on foreign homeownership is being considered in Ottawa. However, Holt’s perspective remains that this policy might not directly address the underlying drivers of the recent boom – shifts in demand fuelled by pandemic trends, limited supply, and an increase in household savings. Craig Alexander, chief economist at Deloitte Canada, echoed this sentiment, warning that interventions designed to make housing more affordable often inadvertently boost demand, perpetuating price growth.
Robert McLister, mortgage editor at Ratesdotca, suggested that a significant rate increase – of 100 to 250 basis points – would be required to truly impact the market. He noted that a rising rate environment triggered by increased wage growth could drive demand.McLister emphasized that the potential for a market correction hinges on sustained, substantial rate increases.
