The debate as to whether or not Canada has a housing bubble is long-standing. However experts pretty much agree that low interest rates play a major part in holding up Canada’s house prices.
Now, interest rates seem to be on the rise – and some insist that this is just the beginning. Because the dominant trend has been a fall in interest rates, Canadian households have been able to carry more debt on elevated home prices. This means that these households are way more susceptible to small changes in interest rates than they have been in the past. In other words, with Canadians’ debt levels at a record high, the average household has never been more vulnerable in the face of an increase in mortgage payments.
Recently, five-year fixed-rate mortgages (the most popular in Canada) have risen by about $40 per month on a $400,000 mortgage. And there may be more increases ahead. There are plenty of economists and experts who expect mortgage rates to keep rising by as much as 0.7% over the next month.
With as little as a 3% jump in rates, 1 in 6 Canadian households will not be able to afford their mortgage; and it’s the young homeowners (under 40) that would be most affected by the rising rates.
Some experts predict an inevitable slowdown in housing. Others predict that the housing market will undergo a small boom, as buyers hurry to establish fixed, lower rates before they get any higher. On the other side of the coin, Canada’s iffy economy means that the Bank of Canada may lower its “key lending rate” – helping push mortgage rates back down. If this happens, Canada’s long-running housing boom could keep on trucking.
So what are home buyers to do? The philosophy of many is to prepare for the worst. However if you’re ready to jump in with both feet, and you can afford it, waiting for house prices to fall as a result of high interest rates might be the best thing to do.
The bottom line is that your home is more than capital or equity. It’s your sanctuary, where you build memories with friends and family. As long as you ensure that you can comfortably afford your payments and peacefully enjoy your home, you don’t need to be unreasonably concerned about predictions regarding rate changes in the market.