What are the reasons for 'cautious optimism' on the housing front?
Canadians are likely to withstand the impact of further interest rate hikes, according to a new report by accounting agency KPMG which suggests reasons to remain “cautiously optimistic” due to the “solid foundations” of the country’s housing finance system.
“When it comes to managing risks in the housing market, it’s important to differentiate between idiosyncratic and systemic risks,” said Mathieu Laberge, partner and leader for economics and policy at KPMG Canada. “A little-known fact is that there are built-in mitigations that help mortgage holders and financial institutions mitigate the systemic risks they could face.”
Laberge gave examples on cases where Canadians could be optimistic if they are able to identify how to mitigate risks with their mortgage:
“If you hold a mortgage, there’s a good chance you’ll see your payments rise over the next three years, if you haven’t experienced a bump already,” he said. “If you have a variable-rate mortgage with fixed payments, you could be looking at a 40% hike when you renew your loan.
“If it’s fixed-rate mortgage, you’re potentially facing a 20-25% jump in the next three years. That’s from the Bank of Canada’s most recent financial system review in May — and before it raised its benchmark interest rate by 25 basis points to 4.75% on June 7, and then a further 25 basis points to 5% on July 12.”
Laberge shared options that could be of use to mortgage holders:
- Re-amortize mortgages over a longer period (even longer than the typical 25 years) to reduce monthly payments.
- Defer mortgage payments for a short period of time.
- A missed-out payment over the total repayment period.
- Convert a variable mortgage to a fixed rate in order to protect against further rate hikes.
Laberge also noted recent housing data reflected a potential growth, with the Canadian Real Estate Association reporting an increase in home sales by 5.1 % month over month in May.
“Next summer will be an important milestone for the Canadian housing market, as we head into the period where the bulk of interest rates increases from last year start to be felt,” said Laberge.
“Nevertheless, Canadians are in a good position to manage their personal finances and exposure to the housing market. And inflation is keeping to its moderating trend, recently dipping below three per cent.”
