TORONTO, July 30,
2024 /CNW/ - Mark Twain once said, "History doesn't
repeat itself, but it often rhymes." While he wasn't specifically
talking about interest rate cycles, many believe that rate cycles
follow specific patterns that can help us forecast market
behavior.
The Bank of Canada benchmark
rate (BoC Rate) was cut on
July 24, 2024, marking its second cut
in the past two months. Given that government bond yields have also
dropped, the current best fixed and variable mortgage rates, shown
below, are at their lowest in the past 17 months.
Term
|
3-yr fixed
insured*
|
3-yr fixed
uninsurable**
|
5-yr fixed
insured
|
5-yr fixed
uninsurable
|
5-yr variable
insured
|
5-yr variable
uninsurable
|
Lowest Rate
|
4.59 %
|
4.94 %
|
4.39 %
|
4.84 %
|
5.40 %
|
5.70 %
|
The lowest mortgage rates are taken from the WOWA's Canada mortgage rate page on July 30, 2024.
* Insured mortgage: Borrowers have mortgage default insurance (e.g.
required with down payments under 20%)
** Uninsurable mortgages: These mortgages can't be insured (e.g.
homes above $1 Million)
While some believe these low rates might boost the real estate
market, recent history tells a more complex story. We at WOWA Leads
analyzed mortgage payments for a new purchase versus income over
the last 50 years in Canada to see
if there is any correlation between home prices and drops in
mortgage rates from their peaks.
The above graph shows that the mortgage payment for a recently
purchased average property in Canada consumes nearly all of the average
person's disposable income. Currently, the Toronto and Vancouver housing markets are stagnant, while
the more affordable markets of Montreal, Calgary and Edmonton are hot. For example, in the
Toronto housing market, one of the
least affordable in Canada, the
sales-to-new-listing ratio is at 35%, indicating a buyer's market.
Currently, Toronto's inventory is
close to 25k, which is the highest
level since 2010.
This level of housing unaffordability has only been reached
twice before: around 1981 and 1990. Additionally, unaffordability
peaked around 1995 and 2007, but to a lesser extent compared to
today. What happened during those times?
Q3 1981 to Q3 1983:
The BoC rate reached its highest historical level of 20.78% in
August 1981 and fell by more than
1100 bps to 9.26% in July 1983. Did
this significant rate drop help the real estate market? Not really.
During Q3 1981 to Q3 1983, the Canada home price index declined by 14%, while
inflation rose by 17%. The change in prices was very fast in
specific areas. For example, in Vancouver, home prices declined by nearly 40%
from early 1981 to mid-1982.
Q2 1990 to Q1 1994:
During this period, the BoC rate dropped from 13.5% to 3.6%. Did
this help the real estate market? Again, it did not. In fact,
during this time, home prices in Canada dropped by 8%, while inflation rose by
10%. The speed of price change varied significantly in different
areas. For example, the Greater Toronto
Area's home prices dropped by 28% from April 1989 to August
1993.
Q1 1995 to Q4 1996:
Unaffordability peaked in 1995, though less severely than in
1981, 1990, or 2024. During this period, the BoC rate fell from
8.2% in March 1995 to 3% in
November 1996, but home prices still
declined by 4.5% while inflation rose by 3%. Prices dropped faster
in some of the least affordable areas. For example, from
August 1994 to October 1998, Vancouver home prices dropped by 17%.
2007-2008 Global Financial Crisis:
Unaffordability peaked again in 2007, though less severely than
the current level. Between Q2 2008 and Q1 2009, home prices
decreased by 9% while the BoC rate declined from 4.25% at the start
of 2008 to 0.25% in April 2009;
however, home prices rebounded quickly in Canada in 2009.
Why Do Home Prices Drop When Affordability Improves From Peak
Unaffordability?
We believe this occurs due to the lag effect of rate hikes and
the economic deterioration that typically follows the peak of the
rate cycle.
Lag Effect of Rate Hikes: In Canada, since most
mortgages are fixed rates, the real impact of rate hikes is felt
primarily during renewals, which often occur after rates have
peaked. This is when some sellers are pressured to sell their
properties.
Economic Deterioration: The BoC rate cut implies that
inflation is dropping, typically caused by a slowing economy,
higher unemployment rates and possibly lower self-employed
earnings. Higher unemployment is one of the strongest factors in
decreasing home prices.
What Will Happen to the Canadian Housing Market Over the Next
Year?
As of now, the Canadian housing market is performing differently
across provinces. While Ontario
home prices have declined in the last couple of months,
Quebec and Alberta are experiencing steadily growing
prices. This means we can't make a singular prediction for the
whole of Canada. Based on
historical performance, unaffordability typically results in lower
prices after the rate peak. Therefore, we can expect Ontario, especially the GTA, to see some price
moderation while Alberta and
Quebec can remain relatively
stable. One thing is certain: we haven't yet seen the full impact
of high rates on the housing market.
About WOWA Leads Inc.
Founded in 2018 by Hanif Bayat, PhD in Toronto, Canada, WOWA Leads Inc. is a dynamic
content platform dedicated to empowering Canadians in their
financial journey. With over 1,000 guides, tools and calculators,
WOWA is known as "Canada's
Personal Finance Encyclopedia" and now, with one million monthly
page views, is proud to be at the forefront of helping Canadians
make more informed financial decisions by "Simply Know Your
Options."
SOURCE Wowa Leads Inc.