Cost of carrying a home set to spike in Canada. What's worse, incomes will lag

Theglobeandmail.com
Oct. 6, 2017
By Michael Babad

Briefing highlights

• Cost of carrying a home to spike
• Global stocks mixed so far
• New York futures down
• Canadian dollar at about 79.5 cents
• What to expect from jobs reports

Costs to rise

The cost of home ownership in Canada is about to spike, dealing another blow to affordability in some of the country's wildly inflated markets.

Bank of Nova Scotia now projects that average mortgage carrying costs among new buyers will climb by about 8 per cent next year and 4 per cent in 2019.

To put that in perspective, those increases will "easily" eclipse the rise of about 2.5 per cent in average annual per-capita income, the bank said in a new outlook.

"Low unemployment and strong household formation, reinforced by aging millennials and high immigration, remain supportive of housing demand, further buttressed by international capital inflows," the bank said.

"Nonetheless, we anticipate some moderation in home sales over the forecast horizon, as rising borrowing costs and tougher mortgage-qualifaction criteria lead to some further erosion in affordability, especially for first-time buyers in major urban markets."

The forecast increases in the next two year assumes "relatively stable" home prices, the bank said.

It calculates monthly carrying costs as principal and interest payments for an average-priced home, based on the average of the prime and five-year fixed mortgage rate, and assuming a 10-per-cent down payment and 25-year amortization, Scotiabank economist Adrienne Warren added in an interview.

The monthly carrying cost is now deemed to be $2,262.

"Existing mortgage holders, which account for only about a third of Canadian households, have some insulation from rising rates," Scotiabank said.

"The majority of mortgages in Canada are fixed-rate, with the five-year term by far the most popular," it added.

"As a result, rising borrowing costs feed through only gradually to mortgage holders. In fact, a majority of fixed-rate mortgages coming due in the near term will roll over at interest rates comparable to, or lower, than those that have been paid since origination …Many households with sufficient home equity may also be able to extend their amortization periods to lower monthly debt-servicing costs further."

Like others, Scotiabank believes the housing market has "likely peaked" amid rising rates and policy moves aimed at easing the froth.

"Deteriorating housing affordability, moderately higher borrowing costs, and consecutive rounds of regulatory policy changes have moderated national resale activity," the bank said.

"Much of the recent slowdown in sales and softening in prices has been concentrated in the Greater Toronto Area and surrounding municipalities, and follows the implementation of a series of provincial measures in the spring of 2017. Activity in the region is showing tentative signs of stabilizing, which implies that market sentiment has now largely adjusted to these latest rule changes."

Affordability is a killer, of course.

Indeed, Royal Bank of Canada said in its latest study on the issue, its affordability measure has "eroded" for eight straight quarters, and in the second quarter of the year stood at its worst level since late 1990.

Aside from Ontario and British Columbia, though, it's largely stable.

Like Scotiabank, RBC noted that higher rates will play a role.

The Bank of Canada has already raised its benchmark overnight rate twice, and more increases are expected this year and next that would put the benchmark at 100 basis points higher. (A basis point is 1/100th of a percentage point.)

"We estimate that, everything else remaining constant, a 100-basis-point increase in mortgage rates would lift RBC's aggregate measure for Canada by approximately 3.5 percentage points," said economists Craig Wright and Robert Hogue.

"All markets would be affected, but the effect would be most substantial in high-priced markets – almost seven percentage points in the case of Vancouver," they added.

"This would occur at a time when housing affordability is already stretched in some of Canada's largest markets. While high sensitivity to a rise in interest rates highlights material vulnerability, the reality is bound to be less threatening as other factors such as income gains will mitigate at least part of the impact."

Stocks mixed

Global markets are mixed so far, with New York futures down.

Tokyo's Nikkei and Hong Kong's Hang Seng each gained 0.3 per cent, while the Shanghai composite was closed.

In Europe, London's FTSE 100 was up by more than 0.1 per cent by about 5:10 a.m. ET, Germany's DAX was up slightly, and the Paris CAC 40 was down 0.2 per cent.

What to watch for today

Statistics Canada releases its September employment report this morning. And, as always, forecasts are a mixed bag.

Estimates of September job creation among some of the big banks range from about 10,000 to 22,000, with unemployment holding at 6.2 per cent or inching up a notch.

"Employment has cooled a bit, and will slow a bit more into 2018, even if the underlying trend will remain positive," said Nick Exarhos of CIBC World Markets.

"With fewer unemployed people to choose from, slower employment growth will be a reality over the next year, although the bidding up of wages should support household incomes."

We'll get the U.S. jobs report at the same time, and economists generally expect to see employment gains of up to about 90,000 and unemployment holding at 4.4 per cent.