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BY: ROB CARRICK / Globe & Mail (September 9, 2010)
So much for the housing market being crushed by rising interest rates.
The Bank of Canada cranked up its trendsetting overnight rate for the third time in four months on Wednesday and the impact will be felt by a wide range of borrowers. But home buyers? Not so much.
True, the central bank’s increase of one-quarter of a percentage point has already been applied by the major banks to their prime lending rate. That in turn means variable-rate mortgages, plus lines of credit, are now a quarter-point more expensive.
But there are two trends that offset higher carrying costs for variable-rate mortgages. One is that fixed-rate mortgages, notably in the popular five-year term, have been coming down in recent weeks and are now as low as 3.59 per cent. That’s a fabulous rate, by the way.
The other trend is a return to previous levels of discounting in variable-rate mortgages. With their usual dexterity, the banks used the financial panic of 2008 and early 2009 to ram through higher lending costs on a variety of products, including variable-rate mortgages. Now, some of these rate hikes are being unwound.
MorCan Direct, a Toronto mortgage broker, notes that pricing on variable-rate mortgages has over the past 20 months fallen from prime plus a full percentage point to prime minus as much as 0.65 to 0.8 of a point. The level of competition in the mortgage market suggests to MorCan’s Travis Allinott that by next year we’ll see banks offering their best precrisis deal on variable-rate mortgages – prime minus one percentage point.
“We definitely believe it’s going to get back to prime minus 1,” Mr. Allinott said “It’s a rate war out there.”
Wherever variable-rate mortgages end up, it’s clear that pricing trends in the marketplace are offsetting the Bank of Canada’s rate moves to some extent.
On the fixed-rate side, there have been at least four rounds of rate cuts by the big banks since the end of May. Last week, Bank of Montreal lowered its special five-year rate to 3.59 per cent from 3.79 per cent (note: this rate applies only to 25-year mortgages and offers limited prepayment privileges). Back in May, discounted five-year mortgages went for something like 4.7 per cent.
Lenders price fixed-rate mortgages off the yield on Government of Canada bonds, not the Bank of Canada’s overnight rate. Bond prices have been rising lately, which means yields have fallen because the two move in opposite directions.
Things get a bit weird here because good times for bonds have lately coincided with bad times for the economy. And yet, the Bank of Canada is confident enough about the economy to have raised rates repeatedly.
Craig Alexander, chief economist at Toronto-Dominion Bank, explains that trading in Canadian bonds is heavily influenced by what’s happening in the U.S. market. Down there, of course, there’s a lot of worry about a return to recession – the dreaded double dip.
The Canadian economy has slowed, too, and nowhere more markedly than the housing market. This was widely predicted many months ago, but ironically it was rising interest rates that were supposed to drive the decline.
Mr. Alexander said rising rates have had only a very small negative impact on house prices. More important factors have been a rise in the inventory of homes for sale, a rush to buy in 2009 and early 2010 when rates were at rock bottom, and the expectation that rates would rise.
Today, he sees rates as being supportive of housing. “Rates are remarkably low by historical standards. People get so hung up on the direction of interest rates. The level matters.”
Rates will increase from here, but Mr. Alexander doesn’t seem them as a major problem for housing.
“The fact that rates are low and likely to rise at only a gradual pace in the next 18 months suggests you really aren’t going to get a major correction in the housing market,” he said. “What you’re going to get is a period of softening, some declines in sales and a modest correction in housing prices. But after such a strong run, you could expect that.”
Interested in variable-rate mortgages even though they’re captive to the Bank of Canada’s rate moves? Mr. Allinott suggested starting with a one-year closed mortgage, which you may be able to get for as little as 2.44 per cent. In a year, he suggests jumping into a variable-rate mortgage.
Variable-rate mortgages could be more costly then, but pricing pressure might just get you a prime-minus-1 deal.
The year in interest rates
|Year ago||Early 2010||2010 peak||Today|
|BoC overnight rate||0.25%||0.25%||1%||1%|
|Posted five-year fixed-rate mortgage||5.49%||5.49%||6.25%||5.39%|
|Source: Bank of Canada|
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Greater Toronto REALTORS® reported 6,232 sales through the Multiple Listing Service® (MLS®) in August 2010. This represented a 22 per cent decrease compared to the 8,035 sales recorded during the same period in 2009. New listings decreased by one per cent year-over-year to 10,488.
“The prospect of interest rate hikes and new mortgage lending rules prompted some households to purchase a home sooner than they otherwise would have this year. The result has been a larger than normal dip in sales over the summer months. With this said, it is important to recognize that sales on the year were eight per cent higher than in 2009,” said Toronto Real Estate Board President Bill Johnston.
The average price for August transactions was $411,012 – up six per cent compared to the average of $387,921 reported in August 2009.
“Market conditions have remained tight enough to support higher home prices in comparison to last year. Under current mortgage lending standards, a household earning the average income in the GTA can comfortably afford the mortgage payments on an average priced home. Market conditions and the affordability picture would have to change dramatically before a sustained drop in the average selling price would take place,” said Jason Mercer, TREB’s Senior Manager of Market Analysis.
In August, the median price was up $358,000, from the $338,000 recorded during August of 2009.