To no one’s surprise, the Bank of Canada bumped the overnight lending rate from 0.5% to 0.75%, the first increase in 7 years. It’s a small jump, one that won’t make much difference to anyone’s debt obligations, but it’s a sign that the bottom is in for rates. Despite various alarmist polls out there (no, an increase of $130/month in payments won’t make most Canadians “struggle”), the majority will be just fine with any conceivable increase in interest rates. Thing is, the majority is also completely irrelevant to the housing market. The important thing is what happens at the margins.
The banks wasted no time hiking their prime rate by the same 0.25% which means it sits at 2.95% (except the special flower TD that charges 3.1%). That means all those HELOCs just got more expensive (the typical HELOC of $70,000 costs an extra $15/month now). Same goes for every variable mortgage out there. Like I said, not going to break the bank for anyone, but it’s a sign that the seemingly endless period of decreasing rates might be over.
For now though, even with a 0.25% increase in the mortgage rate, the majority of the about 80,000 monthly mortgage renewals will be coming off a 5 year mortgage, and will find that the deal they are offered (red line) is still lower than what they locked in for 5 years ago (green line).
The precipitous interest rate drop in 2009 was the reason our real estate market stayed stable. The same house cost drastically less to carry and prices plateaued while incomes increased over several years. The result: improved affordability which stabilized the market. This is why I believe our next correction will not look anything like our last two.
Now we see the other side of the slope. Prices racing ahead, and interest rates on the upward slope too. That will quickly drive affordability back into the danger zone which correlates with price peaks in Victoria.