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Fixed Mortgage Rates Continue To Increase: What's Going On?

In recent times, Canada has witnessed a steady increase in fixed mortgage rates, closely following the surge in Canada Bond Yields. This rise in rates is expected to impact popular mortgage terms like the 3-Year Fixed, which may now reach the 6% range, making it challenging to qualify with an 8% mortgage rate in provinces like BC and Ontario. With the average house price hovering around $1 million, obtaining a mortgage has become increasingly difficult.

You may wonder what is causing this upward trend in mortgage rates. While I'm not an expert in Canada Bonds, one plausible reason could be the remarkable jobs numbers in the United States. Bond trading, in essence, is a speculation on the future of interest rates. The strong jobs data suggests that the Federal Reserve may keep interest rates higher for an extended period. As a result, the anticipated 25 basis points increase in the Bank of Canada's rate announcement next week has already influenced bond yields, keeping fixed mortgage rates at these elevated levels.

Unfortunately, these high mortgage rates pose a challenge to the Canadian housing market. With lower affordability, home sales are likely to decline, potentially leading to a decrease in housing prices. Looking ahead, if the United States continues to report robust job numbers and the Federal Reserve maintains a hawkish stance, we can expect fixed mortgage rates to continue their upward trajectory.

Is The Bank Of Canada Contributing To Reduced New Housing Starts? 

A significant concern in the Canadian real estate market is the adverse impact of Bank of Canada policies on new housing starts. Over the past 15 months, development financing rates have nearly tripled, with commercial bank prime rates rising from 2.45% to 6.95%, soon to reach 7.20%. This drastic increase poses a significant challenge for builders.

In provinces like Ontario and BC, the process of moving from initial plans to actual construction is a lengthy and costly endeavor. It takes years from acquiring land to the point where homebuyers can move in, and developers bear the burden of financing throughout the entire period. Even the billionaire developer families, who dominate these provinces, rely on financing, let alone the smaller builders.

The combination of soaring land prices, escalating building costs, and extensive approval timelines has created a harsh environment for new developments. Tripled financing costs have become a serious threat to the feasibility of these projects. In fact, the rising costs have made lenders more cautious, often leading to the rejection of development financing applications. Consequently, the number of housing starts is declining, exacerbating the situation.

Unfortunately, the outlook does not appear promising. The challenges faced by builders are only expected to worsen, further hampering the construction of new homes. It is crucial for policymakers and industry stakeholders to address these concerns in order to foster a vibrant and sustainable housing market.

In conclusion, the increase in fixed mortgage rates, influenced by Canada Bond Yields and the US job market, coupled with Bank of Canada policies impacting development financing, has posed significant challenges for the Canadian real estate market. Understanding these dynamics can help stakeholders make informed decisions and navigate the changing landscape of the industry.

Inflation numbers are down, but what else is happening? Have you heard of a First Time Home Buyers Savings ACCOUNT? 

Interest rates have been rising rapidly over the past 18 months, something we haven't seen since the time when Trudeau was first in office. This has caught many people in the finance industry off guard, as they didn't consider the possibility of rates going up. Now that rates are expected to remain steady or even increase further until the end of the year, there are concerns about the impact on Canadians trying to afford mortgages. If rates stay high for a long time, it could lead to more people and companies struggling to make payments, causing banks to suffer losses and potentially triggering a recession.

Recently, there has been unwelcome news for prospective homebuyers in Toronto and across Canada. Housing prices in Toronto rose by 3.2% in May, the largest increase since early 2022. Affordability is becoming a major issue, prompting the government in Ottawa to take action. One of their initiatives is the First Home Savings Account (FHSA), designed to help aspiring homeowners save for a down payment.

Although it took some time to launch the FHSA, more financial institutions are expected to offer these accounts to clients this summer. So, it's a good time to understand what an FHSA is and whether it's worth using. Here's a quick guide:

What is an FHSA?

An FHSA is an account, similar to an RRSP or a TFSA, that assists first-time homebuyers in saving for a down payment. You can contribute up to $8,000 per year, with a maximum lifetime limit of $40,000. The money can be invested in stocks, mutual funds, bonds, GICs, and other options. The significant benefits are that your contributions are tax-deductible, reducing your taxable income, and any investment returns are tax-free upon withdrawal. This can result in significant savings.

Is an FHSA worth it?

You might wonder if it's worth it to save $40,000 in an FHSA when you'll likely need more for a down payment. Consider this example: If you contribute $8,000 per year for five years (totaling $40,000) directly from your paycheque, and your investments yield an 8% annual return, you would end up with $48,810, including a return of $8,810. Importantly, this money is entirely yours, with no taxes to pay when you withdraw it for a down payment.

On the other hand, if you put $8,000 per year into a savings account, you would have to pay taxes on that money. Assuming a 32% tax rate, the $8,000 becomes $5,440. If you save the same amount annually for five years and earn a 5% yield, you'll have $29,610 (partly because your gains are taxed). That's an almost $20,000 difference between using an FHSA and regular savings. Additionally, the temptation to use your money for other purchases is likely higher with regular savings compared to an FHSA.

Are there any exceptions where an FHSA may not be suitable? If you have high-interest debt or lack an emergency fund, it's advisable to pay off your debt and build up savings before investing in anything. Also, consider your other financial goals, such as retirement. Depending on your income tax bracket, it might be more beneficial to maximize your TFSA contributions before allocating funds to an FHSA. If you're deciding between investing in an RRSP or an FHSA, prioritize the FHSA first. A great advantage of FHSAs is that if you change your mind about using the money for a home, you can transfer it to an RRSP without affecting your RRSP contribution room. So, it's worth considering maximizing your FHSA. 

What are the implications if mortgage rates remain high throughout the remainder of 2023?

If mortgage rates stay elevated, specifically in the range of 5% with a majority in the high 5% range as opposed to the mid to high 4% range experienced from January to May 2023, two scenarios could unfold:

Borrowers and home buyers adjust to the situation, and the real estate market continues with normal activity.

Borrowers face significant challenges, and home buyers hesitate, resulting in a market slowdown reminiscent of the latter half of 2022, leading to a slump in house sales, possibly reaching 20-year lows.

While predicting market outcomes is uncertain, the prevailing sentiment suggests a possible slump. This is due to the likelihood of the Bank of Canada raising rates in July, which currently stands at a 50/50 chance. As a consequence, fixed rates would also increase. Furthermore, considering US Federal Reserve Chairman Powell's recent statement suggesting no rate cuts for a year, it is expected that the Bank of Canada would follow suit, leading to no rate cuts or reductions in fixed mortgage rates until 2024.

If this rate scenario becomes reality, the real estate market could face several outcomes. Investors may experience more financial strain, potentially causing some to give up. Landlords who were already dealing with negative cash flow, despite high rents, may have initially held hope when rates fell in March, but are now concerned and may decide to sell their properties. Homeowners who were anticipating relief in April might also lose hope.

In truth, the exact consequences are uncertain. However, recent observations indicate a decline in consumer optimism, a shift towards negative sentiment among borrowers, and a quiet withdrawal of potential home buyers in Ontario. These indicators suggest a possible return to the subdued real estate market conditions of late 2022