Navigating Canadian Housing Market in Full Correction Mode with Prices Dropping while Mortgage Rates are Climbing

Navigating the tide of rising Canadian mortgage rates and dropping prices in the housing market in 2022 can be challenging. Hatch is here to help. Continue reading → The post Navigating Canadian Housing Market in Full Correction Mode with Prices Dropping while Mortgage Rates are Climbing first appeared on Hatch Mortgages.

Feb 24, 2024 - 18:40
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Navigating Canadian Housing Market in Full Correction Mode with Prices Dropping while Mortgage Rates are Climbing

Over the course of the last two and a half years of pandemic lock downs and supply chain disruptions, we’ve seen some wild swings in the Canadian economy. Many goods were in short supply, service industries were all but shut down and with work-from-home restrictions in place, suddenly owning a home became the hottest commodity. Bidding wars happened across the country, with home prices shooting up by double digits putting significant upward pressure on inflation going into 2022. As the economy opened up earlier this year, fuel prices also shot through the roof as did the prices for food and many other goods now in high demand. This has led to the highest levels of inflation in decades, causing the usually slow and careful Bank of Canada to take drastic monetary policy measures by hiking interest rates at a blistering pace; from 0.25% in March, to 3.25% on Sept. 07, and the central bank has signaled that more rate hikes are likely in the near future until inflation can be reined in.

Mortgage rates have increased accordingly, just as home prices have dropped. So anyone who got into the housing market at or near its peak in early 2022, might be feeling a bit of buyer’s remorse as what they owe on their home could be significantly more than it would currently sell for, while the interest on what they owe keeps ratcheting up. Although this sudden turn in events can be unsettling for those who recently bought a home, or those who were hoping to sell when the tide of home values was high, owning a home is still a solid investment in the long run. In the short-term, however, mortgage holders will need to navigate some turbulent financial waters to weather this storm.  

Variable Rate Mortgage Holders will Feel the Pinch Immediately

Variable rate mortgage holders will feel the pressure immediately, as their mortgage rates are tied to the overnight rate posted by the Bank of Canada, which has been getting so much press lately due to the rapid succession of increases over the past few months. Even if variably rate holders don’t hit the trigger rate to increase their monthly mortgage payments, they will feel the pain of knowing that they are paying a lot more interest, with each successive rate hike by our central bank, and a lot less of their payment is going toward paying down their mortgage each month.

Fixed rate mortgage holders are somewhat insulated from the immediate financial shock of rapidly increasing mortgage rates, as their rates are typically locked in for a term of 2-5 years, although the rates on fixed mortgages are usually a bit higher than variable rate mortgages at the time of the mortgage application. However, if the rates are still high in a few years when they come up for mortgage renewal, fixed rate mortgage holders need to be prepared for possibly higher mortgage payments, or at least higher rates. The double whammy here is that home prices have been dropping drastically as mortgage rates have been ramping up.

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Home Prices Plummeting Across Canada, Especially in Hottest Markets

Home prices have been sharply declining across Canada since March when the central bank started to raise its rates to rein in runaway inflation. Markets such as Ontario and B.C., which saw the largest demand and price increases, over the pandemic, are now seeing the sharpest declines in home prices as the market corrects under the new reality of steeply rising rates, according to economists at Desjardins:

In B.C. and Ontario, Canada’s housing juggernauts, where “the correction … has been more abrupt than elsewhere,” Desjardins estimates that prices will fall 22 and 24 per cent, respectively, from the peak to December 2023. From December 2019 to February 2022, they rose 43 per cent and 58 per cent on an average basis. But there is a “silver lining” to Desjardins’ outlook. The economists noted the pace of decline in sales has cooled since accelerating in the spring. CBC.ca

Higher Rates Making it Harder for Some to Qualify for a Mortgage

Prospective first-time home buyers looking to get into the market will be assisted somewhat by lower home prices, but increases in the cost of borrowing can make it a lot header to obtain a mortgage these days, especially as the rate increases have been so drastic in recent months. Some prospective home buyers will be sitting on the fence to see where interest rates and home prices will stabilize, while others, according to some leading economists, will be pushed out of qualifying for a mortgage entirely:

“The BoC’s outsized 100 basis-point rate hike delivered on July 13 threw ice-cold water on the market – disqualifying some buyers from obtaining a mortgage.” – Richard Hogue, assistant chief economist at RBC

When Will Interest Rates Stop Rising?

Recent signals from the Bank of Canada have indicated that central bank will continue to tighten monetary policy, by raising interest rates, in the coming months to slow inflation and economic growth. Speaking to Calgary Economic Development, on September 8th, senior deputy governor of the Bank of Canada, Carolyn Rogers, stated that the central bank will continue to raise its rates until the overheated Canadian economy stabilizes to the point where supply can adequately meet demand and inflation gets closer to the central bank’s two per cent target:

“Our primary focus will be to judge how monetary policy is working to slow demand, how fast supply challenges are resolved and, most importantly, how both inflation and inflation expectations respond… Because we are in a period of excess demand, we need a period of lower growth to balance things out and bring demand back in line with supply.” – Carolyn Rogers, Deputy Governor of the Bank of Canada

The U.S. is on a similar course, all but assuring that rates will continue to rise as our economic performance is highly linked to that of our large and influential neighbour to the south. In a recent address to the Washington-Based Cato Institute, Jerome Powell emphasized that the Fed is “firmly committed” to getting inflation under control before public sentiment becomes complacent and resigns to continually higher prices being the norm:

“The longer inflation remains well above target, the greater the risk that the public sees higher inflation as the norm… History cautions strongly against prematurely loosening policy.” – Jerome Powell, Chair of the U.S. Federal Reserve

Currently, many economists and market forecasters are predicting that the Bank of Canada could raise rates as high as 3.5 to 4 per cent or even higher in the coming months. However, key economic indicators such as recent employment figures from Statistics Canada, which have shown a continuous decline for the past 3 month, may give the central bank pause to at least slow the pace of their rate increases:

Canadian employment levels unexpectedly fell for a third straight month in August and the jobless rate jumped, a potential signal interest-rate hikes have started to cool the tight labor market. – Bloomberg.com

Get Hatch Online Mortgages in Your Corner

Regardless of how fast mortgage rates continue to climb, or when rates and home prices will finally stabilize, Hatch is on your side. We’re here to not only get you a good rate in today’s market, due to our longstanding relationships with a variety of established lenders, but our award-winning Principal Mortgage Broker, Dan Martel, has over 30 years’ experience in the industry to help guide you through the mortgage terms and conditions most suitable for your individual circumstances. Dan is very approachable, with a kind ear to any mortgage questions or concerns you may have. Feel free to contact us or fill out our online application and we’ll get cracking on your mortgage today!

The post Navigating Canadian Housing Market in Full Correction Mode with Prices Dropping while Mortgage Rates are Climbing first appeared on Hatch Mortgages.

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