Homebuyers beware

by Neil Sharma20 Oct 2017
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.

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.”

COMMENTS

  • by Joan 10/20/2017 11:21:33 AM

    It has other effects not being considered. Our market is strong and inventory is low, which means that realistically a person wanting to make a move has to buy first because it can takes months and months for an appropriate property to become available. With the new stress test I will no longer qualify to purchase a home without first selling my existing one. If I sell first I’ll be forced to rent interim, which means a lot of upheaval and added cost and personal time and effort, or, more likely, settle for a home which is not really what I want.
    In a market like this no seller will accept an offer that’s subject to selling first, and even if they did that puts me at a disadvantage in negotiating a decent price on the buy side, and possibly settling for a lower price on the selling end.
    I know the measures are well intended but it’s going to make our market even more constricted and have an adverse effect on sales. That lower activity will affect the livelihoods of many trades not just Realtors, and have a ripple effect throughout the economy. The housing market, like the auto industry, is a major driver of the economy. Several years ago the government decided investors should have 20% down instead of 10%. That change caused me to hurry to purchase a property before I was ready and not my first choice. If I hadn’t done it then it would have taken me years to save enough to afford one. That property was not the best and as a result I ended up paying more into it maintenance. It’s my retirement plan, I am not fortunate enough to have one like government employees. I’m personally very tired of my government dictating how I run my finances and making my life worse and harder, not better.

  • by Pat 10/21/2017 3:19:57 AM

    I agree with Joan. I did the same thing several years ago. Too much medelling by the government it drives me crazy

  • by Pat 10/21/2017 3:20:18 AM

    I agree with Joan. I did the same thing several years ago. Too much medelling by the government it drives me crazy

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