Changing rates and the market
The central bank is likely getting ready to hike again on Wednesday, with consensus expectations of a 0.25% increase in the overnight rate. However unlike previous rate hikes that directly increased both the lowest available rates and the stress test hurdle, I don’t believe this will affect the real estate market directly. The biggest impact will likely be accelerating a tsunami of refinancing as borrowers find fixed rates available for a full percentage point lower than what they are paying on variable. Get ready to wait on hold at your bank due to the always “unprecedented” call volume.
Of course the central bank is looking closely at inflation data, and will stop at nothing to drive it back to the target range of 1 to 3%. And if we break down where inflation is coming from, it’s pretty broad based with large increases in many categories.
However we know that everything is more expensive than a year ago. What’s more interesting is if prices are still going up, or if rate hikes and supply chain normalization have already done the job. While there are still things that rose in price in the last 6 months – most notably big ticket food and rent categories – the increases are a lot less, and there are a number where prices have pulled back as well. The massive exception is the category driven (partially) by rate hikes themselves: mortgage interest. Though we can argue about the definition of that category (it certainly lags), it’s clear that there have been real and large increases in the actual dollars households are paying on interest and it’s a significant force pushing up the CPI.
That raises the question: as the central bank prepares to hike again on Wednesday, are they considering the inherent feedback loop? And how low do other categories have to go to counter the impact of rates while returning us to the target range? I wouldn’t want to be in Tiff’s shoes.
We know that the big impact from rising rates has been on variable rate borrowers, where every rate hike is immediately passed on to borrowers. Whether those borrowers end up with actually higher monthly rates when hitting their trigger points, or just ludicrously long amortizations instead is not really material, as the interest costs need to be paid one way or another.
However for fixed rates which are two thirds of the outstanding mortgage book, it’s worth remembering that mortgage holders are still enjoying extremely low rates below 3%.
For the approximately 2% of borrowers that renew every month, the increased rate is a shocker, but as with variable borrowers stressed by trigger rates, fixed rate borrowers can also generally extend amortizations to spread the pain across a longer period.
For those wanting to stay on schedule, the renewal gap of nearly 2% combined with the average mortgage taken out in Victoria 5 years ago ($377,208) means a monthly payment increase of $332 or 18%. That’s sizeable, but given we haven’t seen the much more rapid rise in variable rates trigger a wave of distressed sellers, it seems that a much slower drip of higher rates to the fixed mortgage pool is unlikely to lead to a lot of distressed sellers either. Think of it more as a sucking of income out of the economy putting a drag on things. That drag is likely to continue, but with 5 year bonds dipping back below 3% which signal fixed rates in the mid 4s, it seems the time of continued rate hike shock is over.
Without more rate shocks, I suspect we will see more price stability than last year as long as unemployment holds up. The much anticipated recession and associated drop in employment hasn’t arrived yet, though if it does arrive it normally comes with a significant deterioration in the labour market. The BCREA wrote an interesting paper looking at the real estate market during recessions, and though there isn’t enough consistency in real estate impact to make any predictions, past recessions have come with increases in the unemployment rate from +3.1% to +9.8%. That would bring us from an ultra-low 3.4% to moderate or high rates of unemployment. So far – though provinces with high priced real estate may be more vulnerable – predictions seem to be for a relatively mild recession, but we know how successful those predictions have been in the past.
Also the weekly numbers.
|Wk 1||Wk 2||Wk 3||Wk 4|
|Sales to New Listings||14%||20%||27%||68%|
|Sales YoY Change||-51%||-47%||-48%|
|Months of Inventory||1.6|
Finally sales have started the upward path that we expect in January, though still lagging substantially from the frenzied pace of a year ago. There’s one additional business day this January, but if we end the month down around 40% from the year ago pace, that would put us at the slowest January since 2009 when there were only 247 sales (still a decent chance we also exceed the 294 sales in January 2013).
There’s lots of chatter online about the market picking up this year, for example here’s a thread of anecdotes from Realtors around the province. I’m not one to downplay anecdotes as they often signal market changes before they are visible in the data, but I don’t see a lot of reason to believe this is a significant change. In Vancouver the percentage of properties selling over ask in January is unchanged.
There’s a small uptick in Victoria, but given there have been so few sales I wouldn’t read much into that yet.
It’s certainly possible that we see some return of activity from previously very low levels. As I’ve pointed out repeatedly, with continued low inventory it won’t take much to stabilize the market, but I believe that still-poor affordability will put a lid on how much of a bump we’ll be able to see. I’d be pretty shocked if we saw an actual recovery with payments still this elevated. I suspect most of the excitement online is just people being fooled by the normal seasonal jump in the market that we see every year after the holidays, however the full month’s numbers will give us a better sense of whether there’s any substance to the murmurs.