By Lachman Balani
TORONTO: A year after the tightening of the mortgage rules, the Toronto housing market still stands firm.
Last year, many pundits were aggressively predicting a crash in the Toronto real estate market and vehemently knocking others who said there was no basis for a crash but perhaps a slowdown.
The media was rife with news that the household debt had reached 165% of household income which was unsustainable and that a huge downward plunge in house prices was imminent. Then, in July of last year, the government tightened mortgage rules contracting the amortization term from 30 years to 25 years and increasing the limit of the down payment on homes of more than $1mn. This led to a slowdown of sales but not in prices.
However the naysayers still kept on saying that home prices will fall substantially. As a matter of fact, earlier this year, Macleans, a premier magazine of Canada, titled an article ‘The housing bubble has burst, and few will emerge unscathed’, going on to say, ‘a housing correction—or, possibly, a crash—is no longer coming. It’s here.’ An oft quoted economist from Capital Economics was also very bearish on the housing market as per Macleans.
As late as May of this year, many foreign analysts and magazines including England’s well-renowned ‘The Economist’ said the housing bubble in Canada is about to burst.
However June’s figures for the Toronto real estate market would suggest otherwise. Sales slowed just a measly 1% over last June and home prices increased by a healthy 4.7% year-on-year basis.
It must be pointed out here that mortgage rates have in the last three weeks risen quite substantially with 5 year closed rates going up from as low as 2.79% to 3.19% (please note these rates are only indicative- some institutions may have lower or higher rates) and may even go higher.
The primary reason is because the US Fed’s head honcho Ben Bernanke suggested in his last statement that the Fed might ease off its bond buying programs later this year which sent the bond prices reeling downwards as people started dumping their bond holdings. This led to an exponential rise in bond yields (bond prices and yields are inversely proportional) which in turn led to a subsequent rise in mortgage rates which are tied to bond yields. As an example, in a short span from May 1 to Jul 5, 5 year bond yields, which are tied to 5 year mortgage rates, have risen from 1.15% to 1.87%, representing a huge increase of 62.6%!
This increase of rates has once again spurred talks of a crash in home prices because people will not be able to afford homes at these rates. However, it should be pointed out that many homebuyers already have pre-approvals from institutions at low rates from 2.79%-2.99% which are valid to as late as October, so prices of homes will not move downwards a lot until then to accommodate the current increase in mortgage rates.
If after that home prices do decrease at a healthy rate, then so be it, it would probably be a good sign.
However, in the event there is a huge downward spiral so as to affect the economy adversely, then the government has many aces up its sleeve. The most obvious ace would be to expand the amortization accordion to 30 years, making sweet music as it does so, and then to 35 years and so on. The government has in the last 4 years tightened mortgage rules every year and can loosen it again over the same period, so I personally don’t see a crash in sight anytime soon.
As an example, by increasing the amortization period from 25 to 30 years effectively means mortgage rates can climb 1% and the monthly mortgage payments will not change.
That is to say, one pays the same amount monthly for a 25 amortization at 2.79% as one will if the rates rise to 3.79% for a 30-year amortization.
Barring a huge unforeseen political or economical event, the Toronto housing market is still a safe bet.
(Lachman Balani is a financial consultant who writes on various subjects, including real estate and entertainment)