Mortgage rates falling as Ontario readies housing measures

Theglobeandmail.com
April 19, 2017
By Rob Csernyik

As the Ontario government prepares to unveil measures to cool housing prices in Greater Toronto, another factor is making the market more attractive for prospective home buyers: Mortgage rates have been falling again.

After rising last fall, fixed-term, five-year mortgage rates have dropped along with Canadian government bond yields. Royal Bank of Canada, which raised its five-year rate to 2.94 per cent in mid-November, now features a rate of 2.74 per cent on that same mortgage.

A decline of 20 basis points may not add much fuel to a housing market that is already on fire. But it is enough to cut the monthly payment on an $800,000 mortgage by about $80 a month, assuming a 25-year amortization period. (A basis point is one-100th of a percentage point.) RBC charges slightly higher rates to customers who want to pay off their mortgages over a period that is longer than 25 years.

The drop comes as politicians at all three levels of government work on changes designed to curb runaway prices in Canada’s largest city and the surrounding suburbs.

Last month, the average selling price of a home in the Greater Toronto was $917,000 -up 33 per cent from the year before. Queen’s Park is expected to introduce a package on Thursday to bring down housing costs that could include special taxes on foreign buyers speculating in real estate and an expanded system of rent controls.

Ottawa has introduced a number of changes to mortgage rules designed to mitigate rising household debt and moderate foreign real estate speculation. One of the measures is a stress test applied to all insured mortgages to ensure that home buyers can still handle their payments if rates go up.

Longer-term mortgages are priced off of government bond yields. U.S. Treasury yields went up quickly in the aftermath of the U.S. election, as investors bet that new President Donald Trump’s economic policies - including major tax cuts - would reignite growth and inflation in the world’s largest economy. Canadian bond yields followed suit.

But lately, government yields have been falling again. The outlook for inflation in both the U.S. and Canada remains modest, and Mr. Trump appears to be having some difficulty getting traction on parts of his economic agenda.

The five-year Canadian government bond – the most important number for mortgage rates - now yields 1 per cent. On March 13, the yield was 1.316 per cent.

Still, some experts see higher mortgage rates on the horizon.

Diana Petramala, an economist with Toronto-Dominion Bank, projects an increase of 30 to 50 basis points by the end of 2018. She says that a rise of 30 basis points would account for around an 8- to 10-per-cent contraction in sales, which is enough to temper housing demand but not crush it.

“You would need something like 100 basis points to lead to a slowdown in housing,” she says. “The interest rate is not going to be a catalyst to correcting the real estate market in Ontario.”

The red-hot Toronto housing market has been a cause for concern and, according to Benjamin Reitzes, a senior economist at BMO Capital Markets, it’s casting an increasingly wider footprint. “That kind of regional strength has been expanding pretty meaningfully to areas that aren’t easily commutable from Toronto.”

Bryan Freeman, vice-president of CanWise Financial, says that the low fixed rate can still appeal to those looking to enter the market. “It makes the decision to go [with a] five-year fixed [mortgage] quite clear,” he says.