Mortgage Rates, Mortgage Rates, Mortgage Rates!

The GTA finally has reason to be optimistic about home sales. After a nearly two-year sales drought, April showed strong year-over-year growth to kick off the spring season. The overall volume may still have room to grow to match the high sales years of 2015 and 2016, but any time there is a 17% improvement, it is positive.

Given how flat sales levels have been recently, it is worth asking why the jump in sales happened now? To understand why this may have happened we must examine a few market conditions. Starting with supply, we see that new listings were up 8% year-over-year. In relation to sales this was not exactly significant, and a result, active listings did not change much. Prices were also up, but only moving with inflation, which is unlikely to have a major impact. The Bank of Canada has stopped increasing interest rates; however, they have not yet started to lower them. This would be indifferent news to potential buyers if our major banks and lenders were not moving independently on this front. The Bank of Canada may not be cutting rates, but banks are, and buyers are benefiting, which is likely why we are seeing sales grow again.

Heading into this year, interest rates and mortgage rates seemed to be heading in one direction: up. Unfortunately, the impact of the recent rate increases coupled with the challenges in Canada’s energy sector and the struggling housing market, all meant that Canada’s economic outlook became less confident. This caused the Bank of Canada to ease off of its messaging around rising rates and the major banks appear to be pouncing on that. Almost overnight, after a year and a half of growth, mortgage rates started dropping again. Just six months ago, a mortgage rate around 4% was becoming common. Now, rates below 3% are being advertised once more and this is helping a lot of buyers with their budgets.

buying powerSource: Six Housing Sense

Over the past six months mortgage rates have been dropping, which has brought back peoples buying power. The graph above shows the example of a buyer with a 20% down payment (still impacted by the stress test), and how much their budget grows despite still making the same mortgage payment with lower rates. As a result of the lowering rates over the past six months, potential buyers have seen their mortgage budgets grow by up to 7%. This has happened while prices have barely moved year-over-year, meaning more people can afford the homes they want. This is a huge increase and is clearly having an impact on Toronto’s market.

monthly paymentSource: Six Housing Sense

Looking at this from another angle, we can see how much less a mortgage is now costing a buyer. Using an $800,000 purchase, being roughly the current average GTA home price, and assuming a 20% down payment, the chart above shows the monthly cost of a $640,000 mortgage across various rates. At 3.7%, the monthly payment would be $3,264; however, at under 3%, the monthly cost drops to just $2,996. This equals out to be a $3,216 yearly savings, or $16,080 over a five-year mortgage term. The lower rates are offering buyers real opportunities and at least from what we saw in April, they are starting to take advantage again.

It is no coincident that GTA home prices hit their peak just as mortgage rates were at their lowest. People could borrow a lot more for a lot less money. As mortgage rates started increasing again that was no longer true, and coupled with other factors, sales volumes suffered. Now, even without the Bank of Canada lowering its rate, mortgage rates have started to fall and buyers are bringing this returned purchasing power back to the market. For all the worry about the impact of the stress test, it was seemingly more about the fact that people could not afford the higher mortgage rates themselves. With rates falling, we may once again see how much people are willing to borrow when money is cheap.

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