“The Canadian economy grew more than expected in the third quarter, although the weakening housing investment and consumer spending suggests that higher interest rates are beginning to bite. Gross domestic product (GDP) increased 2.9% on an annualized basis from July to September, Statistics Canada reported Tuesday.”
For my money, it was that stronger-than-expected third quarter gross domestic product (GDP) reading that put the nail in the coffin of any hopes of a 25 bps hike on Wednesday. The Canadian economy—and the real estate market—is proving to be more resilient than many would’ve guessed.
Also, the labour market is not buckling. Of course, we need the economy to cool to help in the fight against inflation.
But, cracks are showing in the real estate market, and this week’s hike will now cause considerable stress for many recent home purchasers who were stress tested back in 2021.
How Bad Are Variable Mortgage Rate Increases: They Just Blew Past The Stress Test
If you got a Variable Rate Mortgage in 2021 the Stress Test was 5.25% your real rate was 1.45%
Seemed impossible to hit 5.25%
After today’s Increase the a good Variable Rate is 5.45%
— Ron Butler (@ronmortgageguy) December 7, 2022
What real estate expert and brokerage owner Ron Butler is suggesting in the above tweet is that home buyers were tested to ensure they could handle a rate that moves to 5.25%. Many recent buyers moved past that financial comfort level. BoC research shows that around half of all variable-rate mortgages with fixed monthly payments have already hit trigger rates, which frequently means the borrowers need to increase their monthly payments. Many more will now hit their trigger rate thanks to Wednesday’s move.
Bank of Canada Rate Increase Creates Wider Cracks in Mortgage World: RE Price Effects
Apart from the obvious fact variable mortgage borrowers pay more and that’s worrisome, there are very specific situations that get far worse
1) Alternative Lender Mortgage Renewals
— Ron Butler (@ronmortgageguy) December 9, 2022
It’s getting scary in the real estate space. I follow a diverse group of real estate experts on Twitter and there are so many reports of recent homebuyers getting letters and calls from their banks as they hit their trigger rate. (This is Ratehub’s explainer on the trigger rate. Ratehub.ca and MoneySense.ca are both owned by Ratehub Inc.)
Folks who bought preconstruction homes and condos may not qualify for a mortgage when it comes time to take ownership.
The bad news is Canadians are rate sensitive. The good news is we are rate sensitive, and the rate hikes should eventually do the job.
When? Only the future knows.