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Why it’s important to review your mortgage now before rates rise

General Angela Calla 17 Jun

Carney warns of trouble in overheated housing market once interest rates rise  Keven Drews, The Canadian Press

VANCOUVER – Canada’s housing market is entering overheated territory and many Canadians could be financially hurt once interest rates begin to rise, Bank of Canada governor Mark Carney is warning.

The central banker on took his case for moderation on Wednesday to Vancouver, the epicentre of Canada’s hot housing market where he says home prices are now on par with Hong Kong and Sydney, Australia, as they relate to average incomes.

And some sectors of the market, like condos in big cities, could overshoot because of speculation from foreign investors.

The housing market is still expected to moderate, he said, but recent signals have been mixed.

Carney has been cautioning Canadians for about two year against getting overextended on mortgage borrowing, but Wednesday’s speech to the Vancouver Board of Trade suggested some frustration that his words have mostly fallen on deaf ears.

The governor said he has been expecting the housing market to slow, but besides some stuttering signals, it has picked up again of late along with borrowing and mortgage credit.

Once again, Carney repeated his warning to Canadians about becoming overextended.

“It is important that it’s emphasized, because it can be forgotten, that we are living in extraordinary times with interest rates that are unusually low, that the outlook for the Canadian economy, the strength of the Canadian economy, the expectations both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels,” he said told a later news conference.

“And so Canadians in taking on debt, or Vancouverites, more specifically, in taking on debt, need to…ensure that they can continue to service those debts comfortably in a higher-rate environment.”

Carney’ speech came on the day the Canadian Real Estate Association released new data showing that average resale home prices rose 8.6 per cent in May from a year ago, and that in Vancouver prices were up 25.7 per cent to $831,555.

At those levels, Carney said Vancouverites are paying 11 times family household income for a home, a multiple similar to global housing hot spots Hong Kong and Sydney, Australia.

When asked if he had any advice to young people who hope to buy a house in Vancouver, Carney responded, “Well, get a good job. That would probably be a good one. Study hard, stay in school and get a good job. How’s that?”

The situation is not as dramatic in the rest of the country, but it’s bad enough, he said.

He noted that it took nearly 12 years for real estate investment to regain its peak after the 1990s recession. It has taken a year and a half this time and, in fact, average home prices are now 13 per cent higher than where they stood before the 2008-2009 slump.

Carney takes some of the blame for the unprecedented run-up in prices, since the key difference between the two eras is that he drove interest rates down to historic lows in order to salvage the economy. The policy succeeded, but at a cost of driving investment from more productive outlets of the economy to housing.

But he also lays some blame on home buyers, who he implies should know better. He said some Canadians are taking on mortgages as if they believe current ultra-low rates will last forever. They won’t, he warns.

“Rates will not remain at their current levels forever,” he said. “(And) the impact of eventual increases is likely to be greater than in previous cycles.”

A four per cent real mortgage interest rate would see home affordability in Canada fall to the worst level in 16 years, he said. The current real mortgage interest rate, which excludes inflation, is about 2.4 per cent.

Other than issuing a general alert, Carney gave few hints what he can do about it and implied that the ball is in the federal government’s court to tighten borrowing requirements again if necessary.

Carney refused to comment when asked whether the government should restrict home ownership to those with Canadian citizenship.

“Obviously, if one restricts demand and takes an important element of marginal demand out of the equation there’s going to be an adjustment to price,” he said.

“But those type of decisions are decisions for communities to make, and they’re complex decisions, and nothing should be read into our commentary about the current environment and housing, whether it’s in Vancouver or across the country.”

“We’re not weighing into that issue at all.”

Finance Minister Jim Flaherty this week also expressed concern with household debt — now amounting to a record $1.5 trillion in the aggregate — and noted he has tightened mortgage requirements three times in the past three years.

Carney suggested in his speech that he will use monetary policy, or interest rate setting, to impact the inflation rate and not exclusively the housing market.