According to Brad Henderson, president and CEO of Sotheby’s International Realty Canada, the rumoured interest rate increase is believed to be in the neighbourhood of 25 basis points – which is about $13.50 for every $100,000 of mortgage per month.
“If it’s only 25, and done in a more leisurely way over time, it won’t have a jolting impact because, first of all, anybody who has a fixed-rate mortgage won’t be affected,” said Henderson. “Only people with variable mortgages and mortgages coming due will be affected.”
Henderson added that a rate increase, while almost certain to have a headwind effect on the residential real estate sector, won’t cause undue pressure.
“If somebody has a $750,000 mortgage, it will cost them another $100 a month if interest rates go up by 25 basis points,” he said, “so it’s not trivial, but by the same token, most homeowners could afford to withstand that.”
However, the outlook for homebuyers is capricious.
This week’s announcement by the Office of the Superintendent of Financial Institutions (OSFI), concerning changes to mortgage underwriting rules, may preclude a plenitude of prospective homebuyers from attaining homeownership.
OSFI has mandated a 200 basis point stress test to the face rate.
“If you look back at that $13.50 for every $100,000, adding 200 basis points is the equivalent of multiplying that by eight, so now you’re over $100 per month of what people have to qualify,” said Henderson. “The confluence of all of those factors will definitely push people either from one price down to a lower price, or from owning to renting, and that’s particularly problematic in cities like Toronto and Vancouver, where the vacancy rate of rental-purpose buildings is less than 1%.
“The policies, whilst well-intended, will have unintended consequences of putting pressure on people who can’t afford to buy being pushed into a rental market, which has an abnormally low vacancy rate.”
While it’s unlikely the next interest rate hike, expected December 6, will be too cumbersome for homeowners, especially those on fixed-rate mortgages, prospective homebuyers will feel the heat.