Canadian Real Estate Price Increases May Be Solely Due To The Bank of Canada

Canadian real estate prices made huge gains, and they may all be due to cheap financing. Bank of Canada (BoC) data shows mortgage interest rates fell sharply over the past year. This boosted homebuyer budgets significantly, without increasing the size of payments. Coincidentally, the amount those budgets rose is in line with how much home prices increased.

BoC Estimates Mortgage Rates Fell 35%

The Bank of Canada estimates the typical variable rate made a sharp decline. The estimated typical variable mortgage rate fell to 1.87% on Oct 22, 2020, down 2.6% from a month before. Compared to last year, this marks a 35.5% decline. To contrast, interest rates fell about 85.7% over the past year. Mortgage rates didn’t fall nearly as much, but that was still a huge boost to budgets.

Canadian Mortgage Budgets Inflated 10-14% Over The Past Year

How did this impact budgets? Let’s do some napkin math to visualize this. Assume a buyer making $100,000 in gross income, with a mortgage over a 25-year amortization. For the sake of simplicity, we’re excluding the stress test, since it doesn’t apply at all to lenders. If the buyer sees a reduction of rate from 2.9% to 1.87%, this increases their budget by ~12.0%. According to CREA, home prices increased about 10.3% at the national level. The payments are the same as last year, but prices increased in line with the credit injection. In bankster, this means affordability was maintained, despite rising prices. Seriously.

What Happens Next? 

Typically during periods of increased risk, financing costs should rise. This is how the market deals with risk – by tightening standards, until the issue is clear. The BoC decided to engage in quantitative ease though, an unconventional policy tool. Instead of rates rising with risk, they fell. Falling rates allowed price increases to be more easily absorbed, by letting households borrow more future income. Essentially, a price boost was created without any improvement to fundamentals. Actually, it came with deteriorating fundamentals, technically speaking.

Over the next few weeks, easy growth through stimulative credit expansion should ease. The BoC has halted buying mortgage bonds as of yesterday. This is likely to help financing costs return to market levels, and shrink budgets a little. With a return to market-based rates, buyers are going to need a lot more exuberance to maintain this kind of price growth going forward.

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  • Trader Jim 3 years ago

    Good points, but I’m disappointed. I thought you were going to elaborate on your mortgage fraud twitter thread. That thing was gold. haha.

  • Robert 3 years ago

    No doubt about it.

    Each time interest rates fall, profitability improves for sellers while risk and liability increase for buyers and lenders.

    Great time to sell real estate. Bad time to buy. Risky time to lend to low-equity buyers.

    • Jamie Cass 3 years ago

      Yup. Just like when rates fell in 2006 in the US, and 1990 in Canada… and it was great to be a seller. 😛

  • straw walker 3 years ago

    While the BOC has withdrawn from the mortgage bond and commercial paper buying it is now increasing it’s Government of CDN bond buying.. which floods the market with more dollars
    In an effort to keep up with the Feds continuing spending spree..
    Junk money buying junk bonds
    When will the market see this as negative to the CDN dollar and start buying Chinese Yuan’s

  • SH 3 years ago

    Awaiting the fake capitalists in the anti-Canadian real estate lobby to tell us this ISN’T socialism.

    • VNM 3 years ago

      Sounds like an offshoot of the anti-capitalist unreal non socialist fake-lobby gibberish movement.

      • Opo 3 years ago

        I don’t man, forcing all tax payers to fatten pockets of real estate speculators in Toronto and Vancouver is pretty criminal to me.

        We need the government to punish real estate speculators, not feed them with tax payer money.

      • SH 3 years ago

        Welcome, fake capitalist.

  • Jr. 3 years ago

    I give up. Capitalism is done in this country. Screw it and just load up on debt. Gov’t will bail you out.

  • Val 3 years ago

    This is biggest financial fraud or 21st century Pyramid Scheme. A pyramid scheme is a fraudulent system of making money based on recruiting an ever-increasing number of “investors.” The initial promoters recruit investors, who in turn recruit more investors, and so on. The scheme is called a “pyramid” because at each level, the number of investors increases.

    We will soon become like Venezuela. Work entire month and you can’t afford the rent. Enslaving Canadian middle class.

  • Ghl 3 years ago

    They are printing their way to hyper inflation + sinking all Canadian tax payers into debt to fuel housing bubble inorder to benefit real estate speculators.

    This is the biggest crime against Canadians in history, we need to hold housing criminal gangs accountable. Both Liberals and conservatives are to blame. If they dont bring housing down I will.

    • Holton 3 years ago

      Look these corrupt politicians cant do anything right. They screwed up the pandemic response. They screwed up a good chance to pop the housing bubble. Only thing they had to do was place a rule that people with multiple residential properties will not get deferrals.

      But of course they are propping up this bubble to benefit their criminal gang and all Canadian tax payer will be left with the bill. Young families will be double screwed because they will be paying for the bulk of this corruption via taxes AND they cant even afford housing in Toronto and Vancouver because prices are so high now.

      Sometimes I wonder if young Canadians are dumb or just blind when they are getting screwed so bad. Especially those in Toronto and Vancouver. Both conservatives and liberals are fuking them over.

      This is literally suking blood out of young familes, this should be a crime in any just society. Where the have nots are paying for the capital gains of speculators.

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