Photo: James Bombales
A looming interest-rate hike is likely to cool the Canadian housing market to an extent, but higher borrowings costs won’t be enough to significantly water down demand despite several real estate-related implications, according to Desjardins.
“A slowdown is expected, particularly among first-time buyers,” writes Hélène Bégin, a senior economist with Desjardins, in a Spotlight On Housing report.
“For others, the impact will be felt when they renew their mortgage loans,” she adds.
In the report, Bégin outlines impacts a Bank of Canada overnight rate hike, which some observers are calling for as early as this year.
Borrowers with variable-rate loans will face higher debt servicing costs quickly
“An interest rate hike will have an immediate effect on holders of variable-rate loans and personal lines of credit,” Bégin begins.
But following a central bank rate move, some consumers will be affected sooner than others.
But many borrowers with fixed-rate mortgages won’t be impacted right away
Fixed-rate mortgage rates track in line with yields on government bonds spanning the same time period, as banks use bonds to fund mortgages. So a five-year fixed-rate mortgage largely reflects the yield on a five-year bond, for example.
“For fixed-rate mortgage loans, the effects will be spread out over their maturities, as they highest interest rates will be required at renewal based on the term initially chosen,” the Desjardins senior economist continues.
Put another way, those consumers who have their rates locked in won’t see their debt-servicing costs increase until they have to renew their mortgages.
First-time buyers will be hit harder than others
While a fourth consideration is how first-time buyers, who typically put forward smaller downpayments, will be most adversely affected, Begin notes “the economic situation remains favourable for households in Quebec and Ontario.”
In fact, both provinces are seeing growth in the number of jobs, while their respective unemployment rates have generally trended downward since 2010, according to Desjardins research.
“The positives for Quebec households continued to accumulate,” writes Bégin. “In Ontario, the job market improved less dramatically, as did consumer confidence,” she notes.