Change is coming for mortgage market dynamics: analysts says.
Lower interest rates, higher disposable income, and increased investor activity have caused a stir in the mortgage market during the pandemic.
So far, the Bank of Canada has kept the interest rates unchanged, but in its recent meeting in January 2022, it hinted at a future series of rate hikes between now and the end of 2022.
Experts now warn that a hike in interest rates is a near certainty.
“We’ll probably have about seven rate hikes and that will take us back to where interest rates were before the pre-pandemic. After that, it’s open for debate,” Robert Kavcic, director and senior economist at Bank of Montreal, told CTVNews.ca in a phone interview on Thursday.
Low mortgage rates since 1975
Interest rates by six major major chartered banks. Low mortgage rates have made obtaining home loans more appealing for many but this may change in case of an interest rate hike.
The mortgage market is being driven by many factors - some of which have been unique to the pandemic.
CTVNews.ca gathered data from different sources and spoke with experts to highlight what is driving the mortgage market during the pandemic and the potential impact of an interest rate hike.
Uninsured purchases of property are driving the mortgage growth
While low mortgage rates have fuelled mortgage growth, a shift in where homes are being bought has also affected the housing prices in many urban cities and in the outskirts. Aled ab Iorwerth, the deputy chief economist with Canada Mortgage and Housing Corporation (CMHC), said more people were opting for larger living spaces in the suburbs during the pandemic.
In a phone interview, he told CTVNews.ca that even with few house listings and soaring prices, people are buying what’s available to them, and these are mostly buyers in higher-income brackets with substantial savings that largely fall under the uninsured space.
Ab Iorwerth said growth in mortgages has been increasingly common in the uninsured space, which means that if a home buyer pays 20% down payment on a mortgage, then they do not need mortgage insurance.
He said during the pandemic, people with high disposable income have made enough down payments for properties that are sometimes worth more than $1 million.
Increased disposable income during the pandemic
Government support measures, coupled with historically low-interest rates, had led to a high disposable income that helped push the demand for home mortgages.
Kavcic said that large transfers of funds from the federal government through support programs also led to large savings. “Household incomes actually rose through the recession, which you never actually see,” he said.
According to a report by the Bank of Canada, Canadians accumulated on average $8,300 in extra savings as of mid-2021. This was a result of limited spending opportunities during the pandemic, financial prudence in some households, and extraordinary income support from the governments. While increased income during the pandemic allowed Canadians to pay back their mortgage payments, it also created a rise in new mortgages. In Q3 2021, Canadian households owed approximately $1.80 for every $1.00 of disposable income earned.
Recent estimates by the Organisation for Economic Co-operation and Development (OECD) found that Canada has the highest household debt in comparison to other G-7 countries.
Kavcic said that people with high disposable income were tapping into some of their equity habits in their existing property and using 20% down payments to purchase a second property. He said federal support programs also created more liquid income, which created more demand for homes and in turn, mortgages. With increased savings and a fall in credit, a record number of mortgages were issued to households which increased the average size of mortgages.
More investors than homebuyers for mortgages
Major players in the mortgage market are investors, who are increasing their share in the housing market during the pandemic.
In a recent report by the Bank of Canada, three different groups have evolved over time— first-time homebuyers, repeat homebuyers, and investors. But during COVID-19, more investors have stepped in to buy homes than the other two categories.
“Investors are now making up a much bigger proportion than they did before the pandemic,” said Kavcic.
The last time such growth in the investor category where the mortgages outstripped first-time or repeated home buyers was in 2017.
Investors currently account for 20% of home purchases in Canada, with a slight increase by repeat home buyers over time. Since 2015, the share of home purchases for first-time homebuyers has been declining, reaching a new low in 2021. In the same six-year period, home prices have risen much faster than disposable income. Ab Iorwerth said prices are so high that it’s becoming more difficult for first-time homebuyers to buy a property with a 20 % down payment.
Because investors tend to be older and in greater debt than traditional homebuyers, there is a potential for even greater pressure in the mortgage market.
Home purchases by first-time homebuyers, repeat homebuyers and investors
Currently, investors account for just over one-fifth of home purchases in Canada. In contrast, share of purchases by first-time homebuyers has declined since 2015, reaching a new low in 2021. During the same period (2015-2021), home prices rose much faster than disposable income. Below, year-over-year growth in the number of new mortgages can be seen, by type of mortgage.
The report by the Bank of Canada noted that while investors are an important source of housing rental supply, they could also be a source of instability for the financial system and the economy as a whole since they can exacerbate boom-bust cycles in housing markets. A gap in the analysis, the report notes, is that details of what sources investors included in their documented income remain uncertain. Details show that a larger debt load of investors is likely to reflect in the total debt service ratio, which is calculated at the time of the latest mortgage.
What could a rate hike mean for mortgages?
“It seems a lot of people think the bank will increase interest rates and so that they may be rushing out to buy property to lock in the interest rates,” said ab Iorwerth.
A hike in the interest rate leads to increased borrowing costs. Typically, a rate hike means that mortgages become more expensive for home buyers.
Kavcic said the rest of this year and next year, the interest rates are going to be on the rise. He said many borrowers shifted from fixed rates into variable rates last year because variable rates have been historically low. But over the next year, those historically low variable rates will be gone.
ORIGINALLY PUBLISHED: CTVNews.ca Data Journalist - Deena Zaidi