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Buyer Beware – Mortgage Rates Set To Rise! December 10, 2009

Posted by DustinRJay in carrying costs, mortgages.
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In my previous post, I had a poll that asked what the biggest perceived supply risk to the real estate industry in Calgary over the next three year horizon.  This was a randomized poll, meaning that the order changed each time.

Well, the results are in and an overwhelming majority selected interest rates rising as the biggest supply risk!

Why is this a risk?  Well interest rates can pull demand forward or push demand backward, but perhaps the biggest impact it will have is on affordability and investor appetite.  What does this mean?  Well if one has a mortgage, and in 5 years the rate is higher and is beyond what you can spend on shelter that means you will be forced into bankrutpcy.  If you are a real estate investor, and your investment depends on leverage, then you may be forced into selling as well if your rent does not cover your increased mortgage costs.  This would cause an increase in new listings, and decrease in sales simultaneously shifting the supply/demand curve for housing.  If this point of equilibrium shifts too much, then it could tip the real estate market back into falling prices.

That being said, it’s not clear that this is a reason for a sharp bust either.  Why?  Well, modest increases in wages of 2% annually over 5 years, and that the loan amount will be reduced due to the principal that is repaid, and that mortgage rates will likely increase only 3%, equals that the majority of home owners who do so today with an understanding of the risks involved and borrow with prudence will likely not end up in arrears.

Buyers who do not understand that mortgage rates are likely to rise risk defaulting when their mortgage is up for renewal.

The following graph shows a forecast for the 5 year conventional mortgage rates over the next 5 years.  The estimated mortgage rate is derived from the historical risk spread relationship over 5 year Government of Canada bond yields.

Note that this forecast is based on BMO’s August 5, 2009 rate forecast.

For more information about the historical relationship between 5 year mortgage rates and 5 year GoC bond yields, one can view this graph, courtesy of Kevin on the Edmonton Housing Bust Blog.

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Comments»

1. Goldenpipe - December 17, 2009

http://www.vancouversun.com/business/Debt+laden+homeowners+warned+interest+rates+squeeze/2349202/story.html

Good blog Radley. Keep up the information updates.

I think that we might just see a huge influx of last minute panic buying to lock in the low rates now in anticipation of the expected rate increase in 2010. From what I have read over the net it seems summer is when the move might happen. Hopefully with political will and a heck of alot of luck we can keep rates frozen next year and try slowly to deflate this insane asset bubble. In my eyes Vancouver is the place to watch if prices are to move down. Alberta is still inflated but no where near the west coast

2. Michael Bladon - December 23, 2009

This is very well presented information. I think a lot of people have been surprised by the performance of Calgary’s market this year which in my experience has been largely driven by first-time buyers and these low very interest rates. I think you’re right that once rates start rising it could tip supply/demand in the opposite direction and maybe soften prices up again.

Your 5 year rate forecast based on bond yields is very interesting although many people lately have been taking variable rate mortgages linked to the prime rate with most predictions I’ve seen showing an increase of 1% in that Bank of Canada prime rate over the next 12 months (starting summer 2010). Do you think this will have any significant effect in the next year?

In my own experience this year, most buyers have learned that real estate values don’t move in only one direction and they’re being more cautious, buying below their means and focusing on building equity to be able to ride out any ups and downs in the short term. Banks are being much more prudent for the most part too.

3. John Ewen - December 29, 2009

No matter where mortgage rates go, real estate investors always need great places to advertise their vacancies. Here is a new one, we are launching, and we would appreciate feedback from the Calgary real estate community, if you are not frozen yet!

Calgary Homes for Rent

4. Chris Smith - January 15, 2010

Interesting Blog. On the face of it I would agree with your prediction, especially considering house prices are on the rise. Hopefully this house price increase is not spurred by a temporary fluctuation in consumer demand for housing, and they stay elevated. A good sign of a potential permanent increase in demand is the supply of single family houses in metro Calgary.

5. Heather - February 17, 2010

A good blog. Thank you for the predictions.

6. Shamon - March 4, 2010

Great Blog!

I’m curious to see if there is any general consensus on how increasing mortgage rates will affect rental rates.

On one hand, it seems that decreased affordability will force more people to rent their homes.

On the other hand, at least in my humble opinion;
Increased interest rates will force landlords to increase their rents in order to cover their expenses.

I suppose I have a vested interest in this matter; I’m a property manager 🙂

7. Self Storage Rooms - March 7, 2010

Good Article.

Middle class america is not going to like this. I bet most of them feel that they are paying way to much for their house as it is.

8. GM - April 3, 2010

Quick question:

Why does the graph show the 5-year rate at 2.5% in July of 2009?
Rates were never this low for a 5 year. The lowest I ever saw was 3.62%.

9. Martha Madison - June 8, 2010

One week has expired since the April 23, 2010 8000 dollar credit. This was a good chance for buyers of new houses to avail mortgage loans. My sister who just moved to Edmonton told me iit really helped reduce her expenses in her mortgage loan. Sadly, it only lasted until April 30, 2010 so I wasn’t able to avail of it.
Although the 8000-dollar credit has just recently expired, we still have a lot of good options to choose from like a mortgage company which will fit our circumstances.

With so many mortgage companies today, it is difficult to select which company can give us good services. One of the best ways is to do research. Just like what I did. I’m planning to move either to Calgary or Alberta and start a new life as an independent career woman. I did research this week about a goodCalgary mortgage company and a reputable mortgage broker in Alberta because I want to be sure I get only company I trust..

We can’t control the rise in mortgage rates but we can choose the company that offers the best bargains.

10. Derek Hulewicz - June 8, 2010

Great article. I still think we are at low end of interest rates historically. I will agree with you though that the rising interest rates will bring more investors into buying as more properties will go into foreclosures.

11. hermes handbags - July 4, 2010
12. hermes kelly bag - July 5, 2010

Great article. I still think we are at low end of interest rates historically. I will agree with you though that the rising interest rates will bring more investors into buying as more properties will go into foreclosures.

13. Menno van Driel - July 14, 2010

Great article, good blog and nice website. I intend to return to it at a later date.

14. Brent Lane - July 24, 2010

Really informative articles on the Calgary real estate market. Would like to hear more of what you have to say. I agree with some of the foreclosure comments above. The downside being that when a comparable in a low turn over area gets sold low due to foreclosure, the banks then devalue high quality homes in this same area. My concern would be that we need a stronger benchmark to compare value in these areas vs. the one sale that went into foreclosure in the last 120 days. Anyways that is the reason why I agree that interest rate hikes are the biggest risk to Calgary real estate buyers and sellers.

15. Jules Seaman - July 29, 2010

Great blog! It will be interesting to see how rising mortgage rates will affect the Vancouver Real Estate market, which has recovered from the recession quite nicely, but slowed down again in recent months.

16. Rick - August 9, 2010

Interest rates cannot rise as aggressively as many say–because we have zero inflation. Many signs of deflation across North America. It is a strange time but rates will remain stable for a couple of more years.

Montgomery Triangle is an area in the Calgary community of Montgomery that is about to go up in value dramatically. We research areas across North America looking for the best values. Many new developments in this riverfront community are making Montgomery a premier spot in which to own real estate.

17. Mike - August 18, 2010

Montgomery Triangle is Awesome!! Montgomery is definitely the best and up and coming area in the Calgary Northwest

18. Ignacio - August 22, 2010

This weekend I watched as they launched all the beautiful spheres down the Bow River at Edworthy Park. It was really beautiful.

But not as Beautiful as Montgomery and the Montgomery Triangle

19. Michelle - August 27, 2010

Montgomery Triangle is Awesome!! and definitely Montgomery Triangle is up and coming in Premier Calgary real estate.

but all of Montgomery and some parts of Bowness are smart places to buy. This real estate slump wont last forever–time to get in and watch as prices go up in Beautiful Montgomery and Montgomery Triangle

20. Jim - August 28, 2010

Montgomery Triangle Calgary

After reading about NotaBle restaurant and this Montgomery Triangle:: I had to give them a shot. Ate dinner at NotaBle last night, it was Excellent. Drove around Montgomery looking for the Montgomery Triangle. Finally found this beautiful little area next to the Bow River and the Shouldice Athletic facility, not many Montgomery people do not refer to the Triangle too much. It is an Excellent area to own some real estate. Very few little homes on big 50 foot lots left. Almost all high end side by side duplexs. Great area!! and Great Restaurant!!

21. Brent Lane - September 2, 2010

I heard through friends that NotaBle was a great success as well. The lineups are crazy, but the experience in Calgary’s food scene is fantastic.

22. home inspection nightmares - September 17, 2010

Excellent info! Good read.

23. Johnny - October 8, 2010

Montgomery is a great area. I grew up there when it was its own town, separate from Calgary. Now, the area is expanding and growing in terms of sophistcation and appreciation. People are finally starting to take notice of this Riverside community. With little pockets within Montgomery like the Awesome Montgomery Triangle and the homes up on the hill with a view of the mountains: There are great places to build your dream home. The new development in Shouldice is world class–this will help the homes in the Montgomery triangle to go through the roof in terms of appreciation.

24. Edmonton Real Estate - October 19, 2010

Great blog. Very informative!

25. Minneapolis commercial contractor - October 31, 2010

This is very informative post for if anyone wants to buy or sell home in this area. thanks for the sharing, please keep it continue…

Thanks,
Corwin

26. jammy2408 - November 4, 2010

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27. Roch - November 18, 2010

What is your take on the current situation we will most likely see a rise in interest rate in Canada very soon.

28. Property Management Companies Calgary - November 23, 2010

Makes me wonder where the rental market is going since rising home prices seem to make for increased rental rates…

29. Christine Peterson - December 22, 2010

Interest rates did go up somewhat since this post, and predictably housing prices came down. Plus, vacancy rates are way up, and many are upside down in their mortgages. There is some denial going on in Calgary, when it comes to just how much housing prices have come down!

30. Greenspan - February 8, 2011

The rental market is overlysaturated with all the condos that were endlessly built.–This makes it very tough for landlords but it is good for tenants as it makes for much more selection, plus with all the supply of rentals: rental rates have come down as well. If you are a young secondary student: gone are the days of cold basement suites, as you can now have a new downtown condo to rent for the same price. Rates have gone up today and they will go up in the immediate short term. But any meaningful interest rate increase will be disasterous for the economy. Too much debt and too few jobs. Real estate in the US is now starting to double dip and an interest rate increase will wipe them out. Calgary will do ok because of oil prices and migration to the city. But not everyone benefits from higher oil prices. Montgomery was one of the very few communities that actually has had an increase in building permits, etc. Mostly luxury homes are going up in this new found community.

31. Jason - February 15, 2011

History always repeats itself, are we about to see rates rise again.
OkotoksRealEstate

32. Greenspan - February 17, 2011

The likelihood of U.S. interest rates having to increase to protect the Dollar is weighing heavily on the market. If the U.S. dollar looses much more ground then the International community will demand change in the pricing of commodities to a more stable currency. If the U.S. responds and increases the lending rate it will kill the recovery if there is in fact any kind of recovery in real terms anyway.

Continued loss of influence throughout the world is also rankling many investors. It will be gradual or seem so, but over time world markets are going to look elsewhere to gage the health of the world economy. People will no longer wait on the U.S. numbers as they have post WWII.

So Egypt and all the other news we’ve seen lately is interesting but it is not the big news story of the decade. It is only a glimpse of what is to come.

Yes change is coming. In a big way!

33. Anonymous - February 26, 2011

When is the next posting coming? Has there been any new developments in the market? Now that things have stabilized, where do you see them going?

34. Jason - March 1, 2011

Great article and I agree with your predictions. We have had a great month and the signs look promising.
OkotoksRealEstate

35. Greenspun - March 22, 2011

Hello Libya, Hello Japan. Wow, Japan is such a shame. It does nothing good for the markets in the short term. Libya is nice for oil towns like Calgary as it will drive the price of oil up. This in turn, is terrible for the US and most of North America. High oil equals high gasoline prices which will help drive most deeper into a double dip recession. Interest rates cannot rise too much anytime soon.

36. Edmonton Homes For Sale - March 24, 2011

Very informative article. Great blog!

37. Calgary Realtor - Crystal Tost - April 2, 2011

Thanks for the post. Interest rates obviously cannot stay where they are forever, and that is concerning as they change and how that will affect affordability of home ownership. Calgary Real Estate

38. Calgary Realtor - April 3, 2011

Calgary Real Estate market should pick up pace this spring as mortgage rates remain affordably low. March single family home sales have increased by 14.1% as shown on Calgary MLS stats report.

39. danni - May 8, 2011

Thanks for very interesting post. I have a high regard for the valuable information you offer in your articles. I really believe you will do much better in the future
Time Share Disposal Group

40. maple ridge houses - June 8, 2011

Thanks for the information. I think that when looking to buy a home we need to look ahead and see what could possible happen if the interest rate goes up or goes down. In here BC we can see a trend where people are buying homes in areas such as Maple Ridge, Abbostford, Mission and the lower mainland and it seems that more people are leaving Vancouver for the same reason

41. Zander Irron - July 21, 2011

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42. Real Estate Agents Thornhill - July 27, 2011

This is a bad time for mortgage rates to go up. People are already hesitant these days to buy their first home or a new house with prices as high as they are these days, raising mortgage rates is not going to help with that.

43. Rufus - September 12, 2011

Sept 2011—Whoeeeee!!!! Interest rates not going up anytime soon!!! Good deals coming in terms of real estate in Calgary. People are buying up the bargains in Montgomery and Bowness and probably everywhere else. I dont know as “my group” only buys in the best up and coming spots in a city, which we feel is Montgomery and Bowness.

Montgomery triangle is Awesome!

44. joamickrei444 - September 17, 2011

I looked around and kind of liked your blog here. I’m curious why you stopped updating here? Hope to hear…

45. Real Estate Calgary - October 13, 2011

It is truly important for buyers to make sure that aside from the house itself other important factors will also be given the right amount of attention.

46. Atchut - February 4, 2012

retty good post. I just stumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way I will be subscribing to your feed and I hope you post again soon.

ipro-global.

47. Jared - February 26, 2012

The experience in Calgary’s food scene is fantastic.

48. Steve - February 26, 2012

It’s 2012 and Calgary Real Estate market should pick up pace this spring.

Panorama Hills Calgary.

49. Home Heating Systems - February 28, 2012

I cant find a link where i can subscribe to this blog, webmaster how can i follow your blog?

Teddy Tschicke

50. Find houses for sale in Calgary - May 21, 2012

People have been saying that rates were going to rise for years now, but it hasn’t happened yet. They have to eventually go up, but as long as people are saying it is imminent, they will stay low. The market would not be able to handle a big jump in rates.

51. MLS Edmonton listings - August 18, 2012

With the world economy the way it is, rates can not go up any time soon. If mortgage rates were to rise more than 1 percent, it would put home ownership out of reach for many first time buyers, especially since the government changed the maximum amortization to 25 years.

52. CalgaryBoy - September 26, 2012

Will you be updating this blog? Change is happening in Vancouver and TO…would love to see analysis for the Calgary housing market.

53. emma - January 16, 2013

Real estate about to crash in canada. Word!!! Best deals in n. America are in montgomery calgary.

Montgomery is awesome

Montgomery triangle.is.awesome!

54. Glenbrook Calgary realtor - February 27, 2013

Thanks for information. As per my thinking property prices will crash in Canada.

55. Calgary Homes - October 31, 2013

Real estate will not crash in Calgary. Also interest rates will not shoot up anytime soon. People have been saying these things for years and it has not happened. Calgary is the best place in Canada to hold real estate and it will continue to be for the foreseeable future

56. Creekside Meadows homes - January 13, 2014

Here it is 2014 and rates are still really low. We have been hearing for 5 years now that rates will rise. I think once the experts start saying that rates will not rise – that is when we should worry.

57. Kimberly Kimball - June 26, 2014

Where you’re headquartered says a lot about how your business perceives itself. Are you making the right statement about your company? Check out this article for our top 10 considerations.

http://www.commercialcalgaryrealestate.com/advice.html

58. Norton Coupons - September 30, 2014

Howdy! This is my 1st comment here so I just wanted to give a quick shout out and tell you I genuinely enjoy reading through your articles.
Can you suggest any other blogs/websites/forums that go over the same subjects?

Thank you!

59. Kevin Leung - November 11, 2014

Good Blog, you should restart

60. Ron - December 14, 2014

Wow!! Very interesting posts over the past few years. You people have been very wrong. Sinking oil prices will set back Calgary real estate which is good–it was getting too hot—now more people can buy as prices drop. I researched this Montgomery triangle that is often spoke of: it is the South side of the Montgomery community in the Northwest. Great spot—it is gentrifying rapidly. Montgomery triangle has less than 40 homes in the little South pocket of Montgomery and I counted 6 new high end duplexes and infills being built there. Hey Calgary realtor, what do you think of that spot?

Montgomery triangle is awesome

61. Broder Homes - January 26, 2015

Even with oil prices crashing we are still seeing strong demand, but we do offer more affordable homes in central alberta in Clive, Lacombe, and Blackfalds. We feel mortgage rates will remain low for quite a long time yet and this will prevent any kind of freefall in prices. Alberta survived the 2008 recession and we will survive this.


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