According to RBC’s latest report, in the first quarter of 2011 housing
affordability in Canada eroded. Moreover, it can keep getting worse this
year because of the rising prices and mortgage rate hikes. “Canada
has entered a period of steady increases in homeownership costs. And, of
course, it will reduce the housing demand in Canada for the next few
quarters,” - said Robert Hogue, senior economist with RBC. “It’s
unlikely that we’ll see an improvement in affordability in 2011”.
In the second half of 2010 the affordability was improving because of declining mortgage rates. Then, in the first quarter of 2011 rates remained unchanged, but there was a sharp increase of house prices. In Hogue’s opinion, it’s obvious that future rising mortgage rates will only worsen the situation.
Benjamin Tal is considered to be one of the major Canadian
macro-economists, whose opinion is widely appreciated. In his recent
speech he explained why the interest rates may rise, but at a very
gradual paste. Canada and the U.S. are in an “unusually uncertain market”, he said.
In his opinion, when the authorities are not sure about what to do next, they tend to choose quite a conservative strategy. And there are certain reasons for that. First of all, trillions of dollars in economic output depend on the interest rate policy. And, moreover, previous recessions have often been caused by the wrong monetary policy.
It looks like the chain reaction also works in the mortgage sphere.
Today it concerns Canadian banks dropping their fixed rates one after
another. On Tuesday the country’s largest bank dropped its posted rate for five-year fixed mortgage by 10bps (0,1%) to 5.59%.
The same thing happened to its special five-year closed - now it’s 4.44%. Of course, other large banks (TD and Scotia) have followed this trend and dropped their posted five-year closed by the same 10bps (0,1%) to 5.59%. It’s obvious that if this tendency goes on, the qualifying rate for variable rate and short term fixed mortgages will go down as well. It may fall from today’s 5.69% to 5.59%.