It’s official, mortgage rates have hit 4% here in Canada. Several of the large banks have increased their popular 5 year fixed rate mortgage above 4%. You’d have to go back to about 2013 when rates were this high. Also worth adding that 2013 was a pretty slow year for housing and so I expect nothing less for us over the coming year.

You have to remember, people buy payments, not houses. If they feel they can make the payment then they’ll buy the house. I won’t bore you to death on mortgage rates but here’s the gist of what you need to know. The 5 year mortgage went from 2.5% to 4% in two months. That increases the typical mortgage payment in Canada by about $550/ month. In more expensive cities like Vancouver & Toronto that increase is even higher.

Now throw in the rising cost of living and you can see that something has to give. The cost and the availability of credit is ultimately what drives home prices. The media likes to talk about foreign buyers and investors but that’s really just skirting around the elephant in the room. At the height of the frenzy people were taking out mortgages at 1.5% with inflation running at 5%. They were being paid to borrow, and borrow they did. I’ve always said that if you had government bonds or GIC’s paying 4-5% I can guarantee you would have a lot less investors in the housing market.

Anyways, prospective home buyers have been whacked over the head with a sudden surge in mortgage rates. Many buyers are now wondering if they should pull the trigger on a purchase before their much lower rate hold expires over the next 1-2 months. The basic question is this, will home prices fall enough to adjust for the higher cost of borrowing? If not, affordability gets even worse.

Ultimately you’re going to see quite a few buyers shift to the sidelines as they wait this out. Here’s what they’re going to read over the coming months. Rising rates and falling home sales. Yes, home sales are now rolling over, not because the market sucks, but because we are coming off all-time record highs from last year. For example, Greater Vancouver home sales just fell 24% year-over-year in March. That’s a pretty ugly headline even though March sales were actually still very strong. However, that’s irrelevant in the eyes of the average buyer. They read headlines and hear stories from their neighbours. Once things start to slow, word travels fast. Sentiment plays an important role in markets, right along with the cost of credit.

The housing market looks poised for a significant slowdown and that’s exactly what the bond market is telling us. A good portion of the yield curve is largely inverted now, which is the bond markets way of saying higher rates are going to slow housing and tip us into a recession.

This doesn’t mean imminent doom, but rather, the inevitable end of this housing bull market which pulled a lot of demand forward through record home sales and price appreciation over the past two years.

Three Things I’m Watching:

1. The Canadian government borrowed a lot of money during the pandemic. Over 60% of that debt matures in 5 years or less. It will be costly to roll that debt with rising interest rates. (Source: Richard Dias)

2. This is not oil, a meme stock or even a shitcoin. It’s U.S mortgage rates. (Source: Bloomberg)

3. Greater Vancouver home sales fell 24% in March but still historically strong for the month. (Source: REBGV)