Canada

Vancouver and Toronto Real Estate Owners Would Be Slaughtered If Rates Rise Just 1%

Vancouver and Toronto Real Estate Owners Would Be Slaughtered If Rates Rise Just 1%

Canadian real estate prices have been fueled by a low interest rate environment, which is coming to an end. National Bank of Canada (NBC) economists are warning that raising rates at this point will severely impact homeowners. To illustrate how much more severe this change would be today, they’ve modeled how much additional income would be required to service higher rates. Historically, the consequences of rising rates across the country would be relatively small. Today, we’re looking at a huge changes in the country’s largest markets of Toronto and Vancouver.

One Percent Hike Would Deteriorate “Affordability” By 3.5%

The chart models the a 100 bps rise in mortgage rates, and the estimated impact on the median household. That sentence probably needs a little unpacking, so here’s a breakdown. 100 bps is the equivalent of adding a full percentage point. If you add 100 bps to 2%, you get 3%. The chart shows how much additional income a household would typically have to devote to servicing their mortgage, since 1980. That is, if it says 9%, it means a household would have to devote an additional 9% of their household income to service the 100 bps rise on their mortgage.

Source: National Bank of Canada.

Raising rates by 100 bps would have the largest impact in history. National Bank analysts note that 20 years ago, a hike of that size would have caused a “deterioration of our national affordability measure by 3.5 percentage points.” Today, they estimate the impact to be about 60% higher. The hike would lower the ability to service mortgages nationally, but Vancouver and Toronto are “particularly sensitive” in their opinion.

Toronto Real Estate

Toronto’s impact would be more than twice as bad as the national average. A 100 bps increase in mortgage rates would consume an extra 8.29% of income in 2017. That’s an all-time high, and 95% higher than the median impact since 1980. This is drastically different from the all-time low of 3%, when interest rates were substantially higher in the fourth quarter of 1980.

Vancouver Real Estate

Vancouver real estate owners would be impacted the most in the country. A 100 bps increase to mortgages would consume 9.23% of income in 2017. That’s also an all-time high, and 83% higher than the median impact since 1980. That’s more than three times the impact it would have had, at the low obtained in 1980.

Montreal Real Estate

To contrast, a city like Montreal would see a smaller impact than the rest of the country. A rise of 100 bps would consume 3.32% of income in 2017. This is below the all-time high, which would have been in the second quarter of 2010. The impact would be 13.85% lower than the median impact since 1980.

The impact would be felt around the country, but Toronto and Vancouver are the most “sensitive” to a rise in rates. NBC analysts also noted this, combined with the OSFI’s new stress testing of uninsured mortgages, lead them to believe home prices are “poised to experience home price declines in 2018.”

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22 Comments

  • Reply
    Michael Z. 3 weeks ago

    This is why it’s important to keep political pressure on keeping rates low. You should share this article with your local politicians, and explain how severely this will impact your household.

    Absolutely insane to stress test buyers, then have the Bank of Canada raise rates when the economy isn’t even doing all that well.

    • Reply
      Ham 3 weeks ago

      Keep interest low because people took out way too much loan fueled by the low interest rate? People should not have gotten themselves in the situation where 1% rate rise would jeopardize their finances in the first place. Unwittingly people who stretched themselves thin on mortgages at historically low interest rate took a bet against economic recovery.

    • Reply
      Matt 3 weeks ago

      The BoC’s mandate is the keep inflation relatively stable, between 1-3%. They would only manipulate interest rates for homeowners to the degree that they believe housing would effect the wider economy and inflation. The stress testing is a convenient tool to try and isolate mortgage rates without having to change interest rates which would be felt across all sectors of the economy. Is it perfect? No. But we are in uncharted territory right now.

    • Reply
      Jacob 3 weeks ago

      Rates have to go up cause of all the debt that has been taken out by Gov’t and Public will eventually drive up inflation. Taxes / oil / and min wage hikes will also drive up inflation. When that happens people will have no money to pay for stuff anyway. in 2008 they should have jacked up interest rates so that people saved and beef up our finances in general. Clean up the bad and start fresh. With low interest rates we kicked the can down the road making the bubbles bigger and inflating new ones.

    • Reply
      Lloyd 3 weeks ago

      Why would anyone want to do that? If rates stay low cheap money is going to continue to stifle the common man’s ability to afford a home and the rate of inflation will go up beyond a reasonable amount. I will not be the ones to do as you suggest

    • Reply
      Jim 3 weeks ago

      A Seller/buyer here. Disagree with you 100%. What you are suggesting is to keep this bubble going until nobody can afford anything, resulting in a big crash.
      It is absolutely necessary to stress test to stop the bubble bursting. I am better off with it. I do not mind taking $100,000 off of my asking price. Greed will destroy us.

    • Reply
      Raging Ranter 3 weeks ago

      Politicians don’t decide interest rates. Central banks do. Politicians have no say in interest rates, and we’d be in a lot of trouble if they ever did. Sometimes rates need to go up even when the economy isn’t doing all that well. In the early 90s we went through a severe and prolonged recession precisely for that reason. Ditto for the early 80s. Rates had to go up both times. Back then it was due to inflation. This time it might be due to asset bubbles and excessive debt.

  • Reply
    shariq 3 weeks ago

    Rate increases destroyed US economy and investors from around the world fled. Rate increases has damaging impact on real estate industry. When real estate is booming, 100s of thousands of workers have their livelihood coming from real estate industry. They have jobs, purchasing power, ability to borrow and pay back loans. This changes dramatically as rates go up. Today number of underwriters are sitting and drawing salaries making banks to lose money. Mortgage holders are at the brink of stress causing anxiety and distress. This leads to more doctors & hospital visits. So please before you think of rate increase, think of the impact its going to have on the economy.

    • Reply
      Trader Jim 3 weeks ago

      You’re right. People vastly underestimate the issue with bubble economics. Cooling the housing market is going to ripple though the economy, since there has been such a misallocation of human capital.

      The government should have mitigated risk when they noticed a greater concentration of the economy slanting towards homeownership. This ramped up when the Liberals were elected with a mandate to increase Mainland Chinese immigration at all costs. Now we have a house of cards, and need to weight the least bad news.

    • Reply
      Mike 3 weeks ago

      “Mortgage holders are at the brink of stress causing anxiety and distress. This leads to more doctors & hospital visits”

      That was hilarious!! That is a new one….

    • Reply
      Lloyd 3 weeks ago

      Dear Mr Shariq
      Why should the government encourage reckless behaviour of persons who bought homes which were beyond their means. If they do go to the doctor because of the stress of rising interest rates, it is more self inflicted than otherwise

  • Reply
    Mike 3 weeks ago

    Raise rates now! They are at historically low levels and have contributed to these insane real estate prices. If people cant handle the raise, too bad. Don’t buy the house of you cant pay for it.

    All these buyers believed the real estate cartel telling them that prices would never drop in GTA, keep buying, don’t think. Canadians are completely indebted, have no cash for savings and blow way too much money on rent/mortgages.

    You want to fix it, raise rates and tighten credit (B20). Party is over.

  • Reply
    Al Daimee 3 weeks ago

    Considering the excessive consumer spending in our culture, being forced to rein in that spending because of rising rates will be a healthy lesson.

    Given that most mortgages are fixed, the rate change won’t make much different to them. By the time they have to renew their mortgage, enough principal has been paid down to mostly offset the rate increase. For variable rate mortgages, the base rate was already at least 0.5% lower, if not more, than the fixed rate and so these mortgageholders enjoyed a lower rate for the earlier part of their term and would have the option to switch over to a fixed rate if there was a concern about rising rates.

    I’m going to say it now: The Toronto market will be able to weather 100bps with minimal impact.
    Perhaps you can’t have your $4.50 coffees every day or eat out and shop as much or as finely as you once could.

    Oh by the way, using the word “slaughtered” is way overblown. There’s clickbait and then there’s going overboard on sensationalizing a story.

  • Reply
    Jeff 3 weeks ago

    Mike you’re blind – foreign investment and the lack of governing it is 100% to blame. Now in addition to new tighter stress tests (to prep for this), they are making it more impossible for Canadians to get into the market to refinance their existing mortgage renewals. Expect foreclosures. This is nothing more than greed from banks backed by our elected officials masked as a cooling metric. Mark my words, raising interest rates will do nothing to tame a spec market. The only people who will dramatically suffer is the locals.

    • Reply
      Al Daimee 3 weeks ago

      A bit of confusion to clarify, a current mortgageholder doesn’t need to do the stress test if they are renewing a mortgage with the same lender. If shopping around for a new lender or changing properties (porting a mortgage and topping up if the property is more expensive) then they will have to pass the stress test.

  • Reply
    Tommy 3 weeks ago

    Rates won’t be increasing much for a long time, and a 1% increase won’t topple Toronto and Vancouver markets.

    • Reply
      Ahmed 3 weeks ago

      It’s a rate trap. Economy does well, we kill it by removing huge amounts of spending. Economy crashes, we increase sensitivity further.

      Prepare for a multi trillion dollar debt added to the balance books, when we need to undergo quantitative easing.

  • Reply
    Dennis 3 weeks ago

    We don’t have to wait long to find out.
    We should be 50 basis points higher by this July.
    I should have sold my Toronto property in the summer. It’s down from 1.1M to 950K. I don’t think it will go under $800 but I am worried about OSFI. How will someone pay if they cannot get financing? I don’t think in this market people are willing to take secondary loans at 10% to make up the difference.

  • Reply
    Justin Thyme 3 weeks ago

    Only when their term expires. Anyone locked in for five years is good for a while. THEN expect a real panic dumping in the Canadian market. By that time, rates should have gone higher across the board, but incomes will not have followed. However, even at 2% wage increase per year, perhaps wages will have gone up enough to cover the spread.

  • Reply
    C 3 weeks ago

    A bubble is not defined by the price of homes, it only a bubble when the owners can not afford the price they paid for their home. I suspect, by a few posts here, that there are more than a few homeowners realizing that they can’t afford their homes, whether there is an interest rate hike, or not. Either the economy is going to do well, and interest rates will rise, or the economy will tank, and unemployment will rise. Either way, the housing market will be destroyed by those who have over spent, or who have taken on too much debt.

  • Reply
    TheDood 3 weeks ago

    Let the market crash. The dummies that bought assets they couldn’t afford can drown in their own debt. There are way too many people in Canada who are leveraged to the hilt because they all drink the same real estate “kool aid” and are blinded by it.

    A major correction needs to happen to ensure the lessons are learned by all – Real Estate should never be treated like an investment AND Only buy what you can afford!

  • Reply
    Bank of Canada: Half of Canadian Real Estate Mortgages Will Renew By Next Year | Better Dwelling 2 weeks ago

    […] breakdown Toronto and Vancouver markets. Fortunately, National Bank of Canada (NBC) economists broke those numbers down for us last week. In Toronto, a rise of that size would consume an additional 8.29% of a median household gross […]

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