Standing down to wait and see how fast next year's rate hikes take place is a wise move, says veteran economist
Prudence by way of preparing for earlier rate hikes appears to be the best strategy for homebuyers at the moment, according to Benjamin Tal of the Canadian Imperial Bank of Commerce (CIBC).
“I think there is a risk of getting into the market at today’s rates,” Tal told BNN Bloomberg in an interview. “We are still dealing with emergency interest rates. Let's remember that these are not normal interest rates and eventually they will rise.”
Tal said that should the Bank of Canada decide to hike at least six times next year, waiting and seeing how much prices grow as a result would be the wise move for consumers.
“If you’re in the market now and you’re thinking about buying this huge house with a huge mortgage, let’s think about it for a second. Can you afford this mortgage if rates will be 10, 150, 200 basis points higher? If not, buy a smaller house or rent,” Tal said. “The bank rate is at 25 basis points now. It might go to 1.5%, maybe 2%, if the market is right. That’s a significant increase over time.”
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“We have to start thinking about higher interest rates and what it means, and clearly, the consumer is the number one victim here,” Tal added. “The question is to what extent higher interest rates will really kill the consumer.”
New buyers will take on a disproportionate amount of this risk, compared to those with existing mortgages.
“The average mortgage now, the new mortgage, is about $450,000. So you do the math. It’s an extra $250 per month, if you raise interest rates by 100 basis points. So, it’s not insignificant,” Tal said. “I think that when it comes to affordability, really the speed at which interest rates will be rising is key.”
