Following TD, Royal Bank, Bank of Montreal and CIBC, Scotiabank is the latest of the Big Five banks to hike its benchmark interest rate, up to 5.34% from 5.14% effective immediately. Financial types say the increases are a result of the rise in government bond yields that signal higher borrowing costs for corporations.
In isolation, it makes sense that higher interest rates result in lower housing costs, as affordability becomes even more challenging. Buyers typically are forced to buy cheaper homes than they may have wanted to in order to keep mortgage payments affordable. But there is no one outcome. The relationship between interest rates and the housing market is multi-tiered.
The speed at which mortgage rates rise comes into play as those who are sitting on their homebuying plans may buy sooner as they see an upward trend, which can actually cause a temporary surge in demand and a rise in home prices. Also, a small dip in prices could help stimulate demand, driving prices right back up.
There’s no substitute for due diligence, but the average homebuyer needs to above all consider their own situation. Our housing market is still strong, but we may have to start buying without the expectation of exponential gains in equity, which could trickle down into a greater challenge using home equity for leverage, whether to make improvements or move up.
Here’s hoping we never again see the kind of double-digit rates we lived through in the ‘80s, but we are likely looking at a slow climb. You should never be leveraged to the point that a .5% increase can make or break your ability to make your payments, but if you’ve been thinking about getting into the market, you may want to get out there and start looking.
How speculators can speed up development
Speaking of affordability, a recent CBC-commissioned poll of British Columbians says the lack of affordable housing is dividing economic classes (86% of respondents) and age groups (64%).
39% said they believed there were splits along racial lines because of sky-high real estate prices. Unsurprisingly, more than 90% said they were at least “somewhat” concerned about affordability, with three-quarters of Vancouver respondents saying they were very concerned.
According to CBC, results showed many (64%) are blaming speculators and foreign buyers for their affordability crisis. (Last month, a report by Realosophy Realty Inc. said that more than 16% of low-rise homes in the GTA were purchased by investors in the first period of 2017, whereas in 2012, investors accounted for just 4.8%. In York Region, investors made up a full fifth of low-rise homebuyers.)
More than half of survey respondents said they thought the government should be considering an all-out ban on foreign real estate investment (58%), while 86% said speculation-curbing measures could be implemented without harming the overall BC economy.
The random sample of 400 adults included just 58 responses from Vancouver and 69 from Victoria/Vancouver Island, which makes it a pretty small sample, but I’m not surprised by the results and suspect a larger sample wouldn’t have turned out much different.
Such surveys reveal perceptions, not realities, and we are generally quick to look for someone to blame when we don’t like what’s going on, especially when “foreign” is a readily available target.
Speculators, though, can play a key role in the development of an urban centre. A couple of months ago, the Financial Post ran a story about how the Paris we all love or dream about owes thanks to the investors and speculators who helped erect thousands of residential buildings a hundred years ago, as the city’s population grew by millions in a few decades.
When faced with a demand that outstripped supply, late-19th century city-builders went looking for ways to funnel more money into new housing projects, and began to welcome speculative investment.
Centering on a book called Selling Paris: Property and Commercial Culture in the Fin-de-siècle Capital by University of Manchester economic history professor Alexia Yates, the article says that between 1879 and 1885, more than 13,500 buildings were erected across the city; between 1870 and 1900, more than 250 real estate companies were established to help fund development, with most of its new housing of the period made for renters.
Toronto is, globally speaking, a very young city, and we should look a little further down the road and try to gain some perspective. Speculators often buy based on sketches and guesses, but can end up financing some soon-to-be flourishing new and reinvigorated neighbourhoods that wouldn’t be possible — or would have taken years longer to come to fruition — without them.