Have Canadians adjusted to today's mortgage market reality?
Canada’s mortgage market has cooled over the past year amid surging interest rates and borrowing costs – but to date, there’s been nothing resembling the full-blown crisis some had envisaged as activity started to fizzle out.
A mini-resurgence of sorts had gathered pace this spring as the Bank of Canada appeared to hit pause on rate hikes, although two further increases by the central bank in June and July helped slow that momentum.
Still, while mortgage and housing markets in Ontario and British Columbia have seen quieter activity as a result of those additional rate jumps, new inventory is slowly hitting the market, meaning Canadians ready to buy in those provinces no longer face the same intense competition of days past.
Dwight Trafford (pictured top), principal broker at Rock Capital Mortgage in Orangeville, told Canadian Mortgage Professional that the continuing resilience of the mortgage market was a testament to the ability of Canadians to adjust to changing circumstances.
While the impact of the Bank of Canada’s shock-and-awe flurry of rate hikes may have taken some time to get used to, Trafford said current homeowners and buyers alike appear to have grown accustomed to the new reality.
“Canadians adapt really quickly to things,” he said. “Their rates one day were 1.5%, the next they were 5%. I think they got over that the day after that. So people get used to what’s coming along.
“They call me and say, ‘What’s the best I can get?’ And I tell them it’s 5.75% or 6.25% or whatever. They compare the market and say, ‘Yeah, that seems pretty good.’”
Toronto's real estate market showed growth in home sales, listings, and prices in July compared to last year, but the momentum has slowed due to higher interest rates. https://t.co/CIYSyqJFV3#mortgagenews #mortgageindustry #homesales #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 3, 2023
How are current homeowners adapting to the new rate environment?
Most homeowner clients on variable rates are also taking a calm approach to the reality of rising mortgage costs as central bank hikes continue, Trafford said, mapping out their options and locking in or stretching their amortization if necessary to make payments more affordable.
Borrowers on fixed rates who haven’t seen their monthly payments jump as a result of the rate increases may see some shock upon renewal a year or two down the line, with that renewal rate likely to be significantly higher than the one they took during the COVID-19 pandemic.
However, Trafford pointed to the stress test rate and banks’ conservative qualifying criteria as reasons to believe those borrowers would be able to shoulder higher mortgage costs without facing financial meltdown.
“There’s room with most people to have a higher payment,” he said. “They may have to not go out as much, they may have not taken as big a vacation, and in some cases they may have to downsize to make [their lives] more affordable and to keep their lifestyle.
“But I think Canadians in general were spending too much on their real estate, and it’s going to bite them in a couple of years and they have to figure it out. But the thing is, there are fixes that are not catastrophic.”
Housing crash appears unlikely despite higher borrowing costs
The bottom hasn’t fallen out of the Canadian real estate market despite home price depreciation as activity slowed during the past year – and the ability of homeowners in most markets to recoup at least what they paid for their property is an advantage in cases where downsizing might be required, according to Trafford.
“House prices have not gone down 50%,” he said. “So the house that they paid $1.8 million for – two years from now, they’ll likely be able to get whatever they paid [back] even if they have to buy something a little smaller, a little more reasonable so they can afford it.
“The fixes are there. They just have to want to do it or get it in their head that what they bought, they didn’t really need.”
It’s important to take the current market in context, Trafford said, and realize that while rates are much higher than they were a year ago, those were unprecedented times that were never likely to last for any prolonged length of time.
“Interest rates will be what they will be and people have to adjust to whatever it is,” he said. “If they come back down, that’s great. If not, then we’ll survive. A 6% interest rate is not horrific by any stretch – it’s just not as cheap as 1%.”
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