In the news … Rate Increases and Affordability

General Tim Hill, MBA 16 Jan

Last week’s fixed-rate interest hikes at major banks—as well as the likely Bank of Canada prime increase on Wednesday—could spell bad news for Vancouver house hunters.

Tim Hill, a mortgage broker with DLC Primex Mortgages, says that interest rate increases and tighter lending standards are adversely affecting Lower Mainland housing affordability, and short shrifting first-time buyers, in particular.

“As far as homebuyers go, there’s been a lot of pressure on buyers over the last couple of years, both with lending standards becoming more restrictive and, more recently, with rates increasing,” he said. “A lot of buyers are feeling the pressure to buy, particularly in higher-end markets like the Lower Mainland. A lot of middle-class people feel like, ‘If I don’t buy now, I’ll never get in.’”

Making matters worse for potential buyers scrambling to enter the market, sellers don’t have much incentive to list and help alleviate the supply crunch. Compounding the problem, says Hill, is the likely prime rate increase on Wednesday.

“I’ve never heard of anyone predicting a decrease—not any time soon—so people aren’t waiting for something more affordable; they’re trying to get in before it keeps going up. The more they increase rates, the more fuel it adds to the fire,” said Hill. “Sellers see it too because they see things going up and they don’t feel any real pressure to sell. There’s a supply shortage, which makes it even harder on the buyers. It’s a vicious cycle.”

The increasing rates are being catalyzed by strong employment and healthy yields on the bond market. Hill added that much of the economic vitality impelling the rate hikes is derived from Canada’s buoyant real estate market, and wonders whether rising interest rates will stunt it.

“As we all know, rate increases have an inverse relationship with the real estate market,” he said. “It’s interesting to see what’s going to happen because if they do raise rates, it’s probably going to affect the one positive sector that we have right now.”

Boris Bosic, president of Merix Financial, wasn’t surprised by last week’s hike and expects another one on Wednesday, the result of which will be tapered consumer expectations.

“From the qualifying standpoint, the higher the rates go, be it the fixed or variable, the less money can be borrowed, meaning consumers will have to lower their expectation on price point with what they’re prepared to buy, or they’re going to have to look at alternative financing,” said Bosic. “We truly believe there will be another rate hike on Wednesday; the prime will go up.”

Bosic added, “There’s the saying, ‘When people want money, they find it,’ so it will either be through Sched-As or alternative financing.”

Sherwood Mortgage Group agent Walter Faria doesn’t think a rate hike is necessary, and says too many things, like B-20, are working against the industry right now. But it isn’t all doom and gloom.

“If you’re dealing with A lenders, it can have an effect, but if you’re dealing with credit unions you have to look at it a different way,” said Faria. “If you’re looking variable, it will affect everybody, but with a credit union for a fixed-rate, it’s not such a big issue. There’s no draw back to credit unions.”