Rate hike won't discourage home purchases, say realtors

But a Queen's University professor points out that Toronto-area homeowners are already feeling stretched.

Thestar.com
July 12, 2017
By Tess Kalinowski

A quarter-point interest rate hike won’t sideline potential homebuyers in the Toronto region, who are still enjoying historically low lending costs, say realtors.

It could even push a few off the fence where they have been sitting since the Ontario government introduced its foreign buyer tax in April, prompting a flood of new resale home listings in May.

Canada’s five biggest banks announced they would boost their prime lending rates by 25 basis points to 2.95 per cent from 2.7 per cent, following an interest rate hike from the Bank of Canada on Wednesday. Those rates are used to set mortgage terms.

The first central bank rate hike in seven years had been expected for weeks.

It comes as the bank predicts 2.8 per cent growth in the economy this year — up from a 2.6 per cent forecast in April. At the same time inflation remains below the 2 per cent target.

In his announcement Wednesday, bank governor Stephen Poloz offered no hint as to whether further increases are pending.

The new interest rate kicks in immediately for the minority of mortgage-holders who are borrowing at a variable rate. It also impacts Canadians with home equity lines of credit believed to account for $211 billion in debt.

“We are talking about $50 per month more on a $450,000 mortgage. People still need somewhere to live, and it’s not like the rental market is cheap. If anything it may adjust buyers price expectations downwards somewhat, but I don’t see it turning many people away from buying,” said Andrew Harrild of Condos.ca.

It could mean a few first-time buyers decide to save longer for a home but the overall impact of higher lending rates on the Toronto property market will be moderate, said Christopher Alexander, regional director of Re/MAX.

He said consumers are more likely to cut back on other spending such as dining out or retail purchases.

“Fifty dollars a month isn’t enough to cause any drastic change in people’s affordability. It’s such a small increase, I think the majority of Canadians will be able to handle it,” he said.

But Alexander is among those warning that it’s time for a break in government intervention in the housing market.

It would be “irresponsible” to implement any new mortgage restrictions that the country’s bank regulator announced last week it was considering.

The Office of the Superintendent of Financial Institutions, which ordered tougher lending rules last fall, is looking at extending stress tests to all uninsured fixed and variable mortgages.

The Ontario Real Estate Association (OREA) also cautioned Ottawa on changes to the capital gains tax exemption on principle residences, which might eat into the profits of home-sellers.

“It’s time for governments to hit the pause button on more demand side policy interventions and take a wait and see approach,” it said in a news release.

In the short-term, it is possible that buyers who fear further rate hikes could jump into the housing market so they’re not faced with even higher loan costs later, said Queen’s University real estate professor John Andrew.

Rates have been so low for so long, there’s a generation of consumers for whom sub-3-per cent lending rates are normal, he said.

It is also possible, said Andrew, that Toronto area buyers, already financially stretched, will be even more hesitant to pay higher mortgage rates.

“Prices have escalated so much people are borrowing every dollar they can possibly borrow. There’s not much of a margin for error. Even when people did that 15 or 20 years ago, income levels were rising. Now they’re falling,” he said.

Royal LePage CEO Phil Soper said he might buy that argument if the rate had been raised 2 per cent, rather than .25 per cent but he doesn’t think the slight interest rise will have much impact and he doesn’t expect another rate increase any time soon.

“Future hikes will depend entirely on the country’s economic performance through the coming months. We haven’t seen any wage inflation. Wage inflation is the big no-no as far as the economy overheating,” said Soper.

If anything, he said, the bank is sending a positive economic signal that should strengthen consumer confidence as people feel more secure in their employment.

Zoocasa CEO Lauren Haw points out that variable rate mortgage-holders tend to be more mature buyers at less financial risk.

“The percentage of people that have variable rates is much higher as you get into higher equity levels in your home because, the reality is historically, that variable rates actually save you a lot of money on interest over the years,” she said.

“First-time homebuyers or anybody buying in the first 10 years of their career, they’re also in the first years of parenting and have a lot of expenses at the same time, just don’t take the risk,” said Haw.

Even with higher interest on home equity lines of credit, many Torontonians will opt to renovate rather than move because of the city’s double land transfer tax, she said. Toronto is the only municipality that has its own tax in addition to the provincial land transfer fee.

“As soon as you put 4 per cent against the average price of a Toronto home, that’s a pretty significant start to a renovation. When you add the land transfer plus realtor fees you end up with a pretty good chunk of money that could be put to a renovation as opposed to a move,” said Haw.