Mortgage rates remain manageable

It’s difficult to scan the latest news without coming across one headline or another that talks about Canada’s housing market being on the verge of collapse or its bubble bursting.

But the true market experts beg to differ. That’s why it’s important to look at the facts.

According to BMO Capital Markets, an examination of valuations and affordability across the country – not just in Toronto and Vancouver – suggests less risk of a nationwide hard landing than implied by many headlines.

In fact, aside from detached properties in Vancouver, Toronto and Victoria, the other major cities BMO Capital Markets studies appear affordable for median homebuyers.

In other words, mortgage payments and other housing-related costs do not exceed 39% of family income (that’s the guideline established by the government in July 2012 for obtaining an insured mortgage).

In addition, with the exception of Vancouver’s condos, Canada’s major cities would remain affordable even if mortgage rates rose two percentage points to more normal levels.

Nationwide, mortgage payments on the average-priced house consume a moderate 28% of household income, or 23% for people living outside Vancouver and Toronto, says BMO. Keep in mind that national mortgage-service cost ratio peaked at 44% in 1989 and 36% in 2007.

Most important, the current 28% matches the long-term norm, suggesting that rising income and falling mortgage rates have largely offset the deterioration in affordability caused by higher home prices.

To pump life into the economy, the Bank of Canada (BoC) has kept Canada’s overnight rate at just 1% since September 2010.

According to BMO, a normalized overnight rate would be closer to 3.5% given the inflation target of about 2%.

RBC Economics also notes that, while home prices are currently elevated, exceptionally low interest rates keep the ownership cost burden manageable for the most part.

While affordability levels generally do not appear to pose a threat to the Canadian housing market at the moment, RBC cautions things could be radically different if interest rates were to move rapidly and significantly higher, explaining that exceptionally low mortgage rates have been the main factor preventing affordability from reaching dangerous levels in recent years.

Thankfully, RBC sees continued lower interest rates, expecting the BoC to leave its overnight rate unchanged at 1% throughout 2013 and raise it only gradually starting in 2014.

The CD Howe Institute’s monetary policy council is recommending the BoC keep the target at 1% until March 2014.

RBC believes the eventual rise in rates will take place at a time when the Canadian economy is on a stronger footing, thereby generating solid household income gains, which, in turn, provide some offset to any negative effects from rising rates.

If interest rates remain low, income continues to rise and home prices stabilize in 2013 – as BMO anticipates – fears of a deep housing correction should recede.

With mortgage rates remaining at all-time lows, now’s a great time to get a new mortgage and/or take measures to accelerate your mortgage payments while rates are still low. There are many ways to pay your mortgage off quicker such as increasing the frequency of your payments from monthly to weekly or every other week, or making extra or lump sum payments.

jturcotte@regionalmortgage.ca or find me on facebook.

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