Interest rates drop at banks supports housing markets
By Mona Mattei
Despite some indications of lower sales prices in the Boundary, the housing market in B.C. and across Canada remains buoyant and mortgage trends show signs of encouraging further investments. The Bank of Canada is ready to meet on Sept. 7 to set upcoming interest rates. Interest rates are a strong indicator for housing sales. Recently, RBC and Toronto Dominion (TD) increased their variable interest rates, but lowered their fixed mortgage rates to bring them more in line with the long-standing low prime interest rates. This shift has sparked an industry trend seeing the big banks moving closer to rates offered by independents. “A combination of factors in the price increase on Wednesday; one, there was a dislocation between the price of the fixed rate book versus the variable rate book which was encouraging, I guess, consumers to really move into a much, much lower variable rate book, which had very, very thin margins,” explained Dave McKay, group head, RBC Canadian Banking. “At the same time, we’re seeing a slight volatility in funding costs in the swap market. So, given the dislocation between fixed and variable the very, very thin margins, we felt we needed to move prices up in our variable rate book. …I think the fixed rate business is well priced and earning a fair return. I think there was an anomaly with the intense competition in the variable rate mortgage business, consumer preference being, I think, artificially driven there because of the price differential to fixed, we had to get it back and to have more even keel…Along with the funding volatility that we’re seeing, we needed to make sure that this product earns a fair return for shareholders. So, we moved rates up.” In other words, fixed-rate mortgages were oozing profit while variable mortgages weren’t paying the bills, said Rob McLister, of Canada Mortgage Trends. “The fact is, if banks priced fixed mortgages commensurate with true funding costs (i.e. reduced fixed rates to match lower bond yields), more people would gravitate to fixed mortgages on their own,” said McLister. “5-year fixed money really should be closer to 3.00% right now (based on the cost of funds). Instead, lenders are exacerbating their variable-rate margin problems by keeping fixed spreads artificially inflated.” As a result of higher home prices and mortgage rate increases, Canada’s housing affordability has slipped for a second consecutive quarter this year, according to the latest Housing Trends and Affordability report released today by RBC Economics Research. Most local housing markets across Canada continue to be reasonably affordable or at worst, slightly ‘unaffordable’, despite this recent deterioration. Vancouver is the major exception. “By and large, the share of household budgets, taken up by the costs of owning a home at current market values, remains close to historical norms,” said Craig Wright, senior vice-president and chief economist, RBC. “However, extremely poor and rapidly eroding affordability in the Vancouver-area market is somewhat skewing the national picture.” The RBC housing affordability measure captures the proportion of pre-tax household income that would be needed to service the costs of owning a specified category of home at going market values. During the second quarter of 2011, measures for the national level rose for all housing categories tracked by RBC (a rise represents a loss of affordability). Canada Mortgage and Housing Corporation’s (CMHC) third quarter Housing Market Outlook, Canada Edition said housing starts are also forecast to remain steady in 2011 and 2012. “Housing starts have been strong in the last few months, but are forecast to moderate closer in line with demographic fundamentals,” said Mathieu Laberge, deputy chief economist for CMHC. “Despite recent financial uncertainty, factors such as employment, immigration and mortgage rates remain supportive of the Canadian housing sector.” The average MLS® price increased in the first half of 2011 partly as a result of more higher-end homes sold during that period. For the remainder of 2011, the average MLS® price is expected to moderate. Nevertheless, the annual average MLS® price will experience an overall increase in 2011 compared to last year. As the existing home market moves to more balanced markets, growth in the average MLS® price in 2012 is expected to be more modest. So what does this all mean to the house shopper? Overall, houses remain within reach for the average household, listings will continue to have moderate prices and bank rates are becoming more competitive in long-term mortgages. All rolled up these factors are encouraging for those of you entering the housing market or just looking to trade up.
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