A personal finance lesson of the past 12 years is that interest-rate forecasts are close to useless – just plan for rates to fall.
Keep this in mind as we look at whether the rate environment for home buyers is the best we’ll see for this generation and possibly in our lifetimes. Rates could go lower if the economy stalls. But with COVID-19 vaccines on the way, there’s reason to believe that stronger growth and, eventually, higher borrowing costs lie ahead.
Home prices in some cities have jumped in 2020, arguably the biggest of the many financial surprises in the pandemic. Low rates are the grease that keeps the market moving as prices rise. And parental financial support for young buyers, of course.
The Ratehub.ca historical mortgage-rate database shows a discounted five-year fixed-rate mortgage one year ago at 2.29 per cent, which was considered a fabulous rate. Today, mortgage brokers are advertising 1.64 to 1.79 per cent for similar mortgages. RateSpy.com has shown a 1.33 per cent five-year fixed rate and the bank HSBC Canada is offering 0.99 per cent on a five-year variable-rate mortgage with a down payment of less than 20 per cent.
Rate-wise, it’s a great time to consider buying. Price-wise, not so much. The average resale home price nationally surged 13.8 per cent in November on a year-over-year basis to $603,344, and cities as geographically diverse as Barrie, Ont., Montreal and Moncton were up more than that. A Canadian Real Estate Association forecast issued Tuesday says prices will climb or remain steady in all regions in 2021.
So maybe you’ll wait for the housing market to plateau or maybe cool off a bit. It might work, but you have to understand how affordability is a function of rates and price together. Consider that average $603,344 price in November – buying it with a 10 per cent down payment and a 1.79 per cent five-year fixed-rate mortgage would cost you a few bucks less per month than if prices fell 5 per cent and mortgage rates increased to year-ago levels.
With lots of zig-zagging along the way, the trend line for interest rates has gone from sky-high to pretty much ground level over the past 40 years. The rate on five-year Government of Canada bonds, highly influential in the pricing of five-year mortgage rates, was 0.5 per cent as of mid-week. RateSpy says the five-year bond yield peaked in September, 1981, at 18.8 per cent.
It’s possible that someone who bought a house 15 or 20 years ago and kept rolling over five-year mortgages has never heard a phrase dreaded by previous generations at renewal time: “Sorry, but rates have gone up.” Bank of Canada numbers show five-year Canada bonds with a yield of 5.5 per cent back in mid-2001, 4.3 per cent in mid-2006, 2.2 per cent in mid-2011 and 0.7 per cent in 2016.
Today’s buyers should expect to renew at higher rates five years from now. But they have a very good chance of starting their tenure as a homeowner with lifetime-low mortgage rates.
The conventional choice would be to lock in current rates for five years, but 10-year mortgages are worth at least a thought right now. RateSpy.com shows rates for this term were as low as 1.99 to 2.14 per cent as of earlier this week. One year ago, people were happy to get five-year mortgages for a little more than that.
What you should not do right now: Rush into the housing market to lock in low rates without first doing an affordability analysis. The right tool for that is The Globe and Mail’s Real Life Ratio calculator. It looks at whether you can afford a mortgage, property taxes, upkeep/maintenance plus real-life expenses such as daycare and car loans, as well as saving money for the future. A low mortgage rate is a false economy if your housing expenses are too high and you start adding higher-cost debt on your line of credit or, worse, credit card.
My vote for the most repeated false alarm in personal finance history is that interest rates have hit bottom. I’ve been guilty of saying it, but I have company in the form of almost all economists.
And so, it has to be acknowledged that rates could go lower from here. It would be sad and ugly for the economy if that happens, but it could. The more likely, and much happier outcome, is a return to pre-pandemic normalcy and higher rates for both borrowers and hard-hit savers.
Let’s hope lifetime-low rates are with us now, and not still ahead.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, December 15, 2020