Will the rise in interest rates take down our housing market?

Fear mongering at its finest? I vote yes-- The Canadians reacted far diffrently from our American counterparts - both lenders and borrowers took on that customary "Conservative" approach. Although Canadians started to get more aggressive in the later months the crisis in the US and Europe hit before we could get too involved or overextended. As the Canadian lending practices were much more controlled it is unlikely "Rate Shock" will hurt too many people in the immediate future.

Neil " Mortgage Man" McJannet

A recent report from Capital Economics states that any move by the Bank of Canada could crush our housing market. Stating that house prices here have risen at the same rate as our counterparts in the U.S., along with inflation and higher interest rates looming on the horizon, they say it’s a recipe for a crash similar to the one that happened in America. As publicized David Madani, even the slightest increase in interest rates could change the housing market, and we know how big a player housing is to a nation’s economy. They are saying that it could be the straw that breaks the camel’s back. According to recent research by CAAMP (Revisiting the Mortgage Market**), 79% of the mortgage market are fixed mortgages for terms of five years or more, and just 21% are adjustable or variable mortgages. Given the new rules implemented by Flaherty in the spring of 2010 concerning the benchmark qualifying rate, the average total-debt-servicing ratio for home purchases with variable and adjustable products were well below the 42%/44% range required by the insurers. This standard has implemented a buffer in the adjustable/variable mortgage market, but unfortunately it has only been in force for less than a year, so those who qualified for adjustable or variable mortgages prior to this may be at risk of an interest rate shock. If rates were to double of what they are today, consumers average TDS would increase and approximately 1% would be higher than the 44% threshold. To put this in perspective, we’re looking at 800-950 mortgages in 2010 that would be affected negatively. The numbers are pretty much the same for fixed mortgages, with a couple of hundred more people affected. Are there people on the brink of a financial meltdown? Without a doubt. How do they stack up against those that could handle the pending increase in interest rates? The numbers are far lower, but ultimately it’s hard to tell exactly how many people will be in trouble when rates move up. Again, it all comes down to financial prudence and according to recent reports by some of the major banks and watchdogs, borrowing and spending has slowed a little. On top of managing current debts, as long as jobs and incomes remain strong, the economy should move along just fine. Whichever way you look at it, the future is unknown. Forecasting is very subjective and personal opinion is certainly at play. Looking at the strong fundamentals of Canada, such as commodities and employment, we are faring pretty well at this point. Of course, when rates increase and inflation moves, we may very well be on our way to a correction or a softening of some kind, but a 25% decrease in home values may be a little too bearish. Will we see a drop in value of 25%? Maybe, maybe not; but I’ll put my money on maybe not. Fear mongering at its finest? I’d like to hear your feedback on the topic. **Findings from this report are based on mortgages that were funded in 2010, consisting of 59,000 insured mortgages for home purchasing, and 26,500 mortgages for refinancing purposes.