GUEST / COLUMN
THE UNSINKABLE MARKET There’s been a lot of talk about rising rates sinking broker boats, but what about the very large number of preapprovals? asks agent Lachman Balani
A year after the tightening of the mortgage rules, the Toronto housing market still stands firm. Last year, many pundits were aggressively predicting a crash in the Toronto Real Estate market and vehemently knocking others who said there was no basis for a crash, but perhaps a slowdown. Media was rife with news that the household debt had reached 165 per cent of household income, which was unsustainable and that a huge downward plunge in house prices was imminent. Also, in July of last year, the government tightened mortgage rules contracting the amortization term from 30 years to 25 years and increasing the limit of the down payment on homes of more than $1 million. This led to a slowdown of sales but not in prices. However, the naysayers still kept on saying that home prices would fall substantially. As a matter of fact, earlier this year, Maclean’s, ran an article with the headline “The housing bubble has burst, and few will emerge unscathed,” that report going on to say, “a housing correction—or, possibly, a crash—is no longer coming. It’s here.” An oft-quoted economist from Capital Economics was also very bearish on the housing market as a là Maclean’s. As late as May of this year, many foreign analysts and magazines including England’s well-renowned The Economist said the housing bubble in Canada is about to burst.
TORONTO It must be pointed out here that mortgage rates have in the last month or so risen quite substantially with five-year closed rates going up from as low as 2.79 per cent to 3.29 per cent (please note these rates are only indicative—some institutions may have lower or higher rates) and may even go higher. The primary reason is because the US Fed’s head honcho Ben Bernanke suggested in his June statement that the Fed might ease off its bond-buying programs later this year, which sent bond prices reeling downwards as people started dumping their holdings. This led
to an exponential rise in bond yields (bond prices and yields are inversely proportional), which in turn led to a subsequent rise in mortgage rates, which are tied to bond yields. As an example, in a short span from May 1 to Jul 26, five-year bond yields, which are tied to five-year mortgage rates, have risen from 1.15 per cent to 1.72 per cent (and even went higher in between) representing a huge increase of 50 per cent! This increase of rates has once again spurred talk of a crash in home prices because people will not be able to afford homes at these rates. However, it should be pointed out that many homebuyers already have pre-approvals from institutions at low rates, from 2.79 per cent to 2.99 per cent which are valid to as late as October, so prices of homes will not move downward a lot until then to accommodate the current increase in mortgage rates. If after that home prices do decrease at a healthy rate, then so be it. It would probably be a good sign. However, in the event there is a huge downward spiral so as to affect the economy adversely, then the government has many aces up its sleeve. The most obvious ace would be to expand the amortization accordion to 30 years, making sweet music as it does so, and then to 35 years and so on. The government has in the last four years tightened mortgage rules every year and can loosen it again over the same period, so I personally don’t see a crash in sight anytime soon. As an example, increasing the amortization period from 25 to 30 years effectively means mortgage rates can climb one per cent and the monthly mortgage payments will not change. That is to say, one pays the same amount monthly for a 25-year amortization at 2.79 per cent as one will if the rates rise to 3.79 per cent for a 30-year amortization. Barring a huge unforeseen political or economical event, the Toronto housing market is still a safe bet.
Lachman Balani is a mortgage agent with the Mortgage Centre M.O.S. MortgageOne Solutions Ltd., based in Mississauga.
JULY 2013 | 63