Well, that didn’t take long.
Yesterday when BeeMo jacked mortgages, thanks to Mr. Bond Market, I suggested it was no aberration. It’s official. It’s a trend.
In fact RBC went a step further than BMO, and its five-year, fixed-rate benchmark home loan now sits at 3.89%, ten bips more than the other guys. This is the fourth rate increase in the last eight weeks. To put things into perspective, mortgage rates have increased by a full 1% since the spring, which is a 37% jump in the cost of a 5-year home loan. In fact, it now costs more to borrow money for five years than it did to get locked up for an entire decade in May – when I pleaded with you to do just that.
And this is not the end of a process, nor is it temporary. It’s the arrival of the big, hairy bête noire everyone’s been warning about for the past two years. Hell, even the Bay Street eggs are sounding the alarm. Here’s Benny Tal, deputy chief economist at CIBC (which is also about to increase rates): “This is the beginning of a test for the mortgage market. It’s a test of how Canadians are able to tolerate higher interest rates. I think this is the real thing.”
You betcha. As you probably heard, the US Fed is about to start tapering back on its frenetic bond-buying orgy, which has goosed stocks, plunged bond yields to historic lows and breathed life back into the American economy. Now that the housing market to the south has revived (prices up 13.7% in a year – the most since 2005), the Fed will unprint money as effectively as it printed it. As a result, bond prices have been falling since June and yields rising.
The 5-year Canada bond which was at 1.15% in April is close to 2% today. That means the bankers whose mortgage costs are tied to bonds are passing through the inevitable to borrowers. If BeeMo, RBC and the rest of the gang thought this was temporary, they’d resist, since new mortgage applications are already tumbling. The fact they did not should tell ya something. It sure spoke to Benny Tal.
So let’s be clear. As I argued in the previous post, the fundamentals of the housing market are terrible. Average prices have inflated to a wicked multiple of both incomes and rents. The supply of certain kinds of properties – like condos – is overwhelming demand. New home sales, included SFHs, have collapsed. Developers have slashed their land purchases. Top-end property prices are down by 20%, while condo buyers are demanding free furniture and waived fees. And personal debt – already at a record, thanks to a house-horny society – continues to increase.
The last pillar left supporting detached house prices of $1,100,000 in Vancouver and $757,000 in Toronto? Yup. Cheap money. The cheapest ever. Mortgages at 3% or less, for the past four years. Never happened before. Emergency rates, ushered in to keep the lights on during the GFC became the crack cocaine of our HGTV nation.
Of course, this series of increases has happened without the Bank of Canada touching its trendsetting rate. Politicians can’t stop or moderate it. But they sure warned it was coming. Cue the elfin deity, from two full years ago: “We are cautioning people not to assume too much long-term debt on the assumption that interest rates will stay as low as they are — because they won’t. We want to make sure Canadian households plan ahead and know, if they renew a mortgage in the next several years, it’s likely that the interest rate will be higher. Interest rates have nowhere to go but up.”
Jim Flaherty should know, since he hand-picked the guy who engineered rates lower, while he himself was bringing in 40-year, zero-down mortgages, creating world-class house porn. If they could suck and blow any better, they’d be airborne.
Well, a rate hike of a fifth of a point won’t bring Vancouver bungalows back to earth. But four of them in a few months, layered over a slowing economy, fewer jobs, tighter lending, CMHC restrictions, flat incomes and a coming gush of listings, should start the job. As this pathetic blog said a few weeks ago, those boffo realtor numbers from July did not foretell a strengthening market. Instead, it was the rush of virgin buyers to sign offers before their low-rate pre-approvals turned into pumpkins. More evidence youth is wasted on the young.
By this time next year a shocking number of them will have lost all of their equity. This was so predictable. I will have no pity.