*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[opendoor]

Originally Posted by Azure

Home values need to decrease enough to make up for interest rate increases.

But will they? Likely not.

That basically never happens.

What has happened in the past though (and probably will this time as well), is prices have stagnated, rates have dropped because of an economic downturn, and wage gains/inflation improve affordability over time.

So for instance, if you compare a mortgage today at 6% to one 5 years from now at say 3.5%, the latter is about 35% cheaper in today's dollars. So even if prices don't drop a penny, the affordability increase is about equivalent to a 35% reduction in prices.

That's exactly what happened in prior eras. From 1990 to 1995, sale prices were relatively flat (at least nationally), but after interest rate cuts and inflation, houses were about 40% cheaper to own in 1995.

[blankall]

Originally Posted by opendoor

That basically never happens.

What has happened in the past though (and probably will this time as well), is prices have stagnated, rates have dropped because of an economic downturn, and wage gains/inflation improve affordability over time.

So for instance, if you compare a mortgage today at 6% to one 5 years from now at say 3.5%, the latter is about 35% cheaper in today's dollars. So even if prices don't drop a penny, the affordability increase is about equivalent to a 35% reduction in prices.

That's exactly what happened in prior eras. From 1990 to 1995, sale prices were relatively flat (at least nationally), but after interest rate cuts and inflation, houses were about 40% cheaper to own in 1995.

Theoretically, if wages catch up to the inflation we have been experiencing, even flat housing prices should should result in a pretty dramatic drop in, inflation accounted for, value. By the time everything is said and done, you're probably looking at 25-30% total inflation since 2020.

As of the end of Q1 2023, housing prices are already down 12%, once adjusted for inflation, from their peak:

https://www.globalpropertyguide.com/...e-price-trends

[opendoor]

Yeah, Q1 2022 to Q1 2023 saw the biggest drop in inflation-adjusted prices in the last 50 years (and probably long before then too):

https://fred.stlouisfed.org/series/QCAR368BIS

However, because rates have gone up so much, affordability has worsened. But when rates are lowered (and they will be when there's a slowdown), then affordability will start to improve.

It's unlikely we'll get back to the lowest mortgage payment-to-income ratios from past eras, as increasing income inequality will prevent that (basically, the median income for homebuyers will stray further from the median income for workers). But I do think we'll see an improvement. It was already happening in 2017-2020 until COVID hit.

[Firebot]

Originally Posted by greyshep

We are in a variable and I can definitely tell you our payment is NOT fixed. We get whacked everytime the interest rate goes up.

Originally Posted by ChuckieNZ

That's technically an adjustable rate mortgage; strictly speaking in a variable rate mortgage the payment doesn't change unless you hit a trigger rate where interest calculations are higher than your fixed payments.

Yes, lenders are really poor at explaining which type of mortgage they offer (this includes the dreaded collateral mortgage). Some lenders provide adjustable terms and others are variable terms.

I had an adjustable rate and a variable rate mortgage at the same time from 2 different lenders...which is where it confused me when one went up with rate hikes while the other one did not. The lender calls the adjustable rate mortgage as a variable mortgage in their emails. I had no idea variable (which does not increase payments) was a thing since I always had adjustable (termed as variable) before.

It shouldn't be a thing. Tons of Canadians will be in for a nasty surprise come renewal, especially as a number of lenders did not force payment adjustments on trigger rates being hit.

[greyshep]

Well I guess I learned something new. Our broker used variable as the way to describe our mortgage but we have gotten a nastygram everytime the BOC has raised interest rates during this last year. We dread seeing that email in our inbox each time it happens.

[powderjunkie]

Originally Posted by Firebot

Yes, lenders are really poor at explaining which type of mortgage they offer (this includes the dreaded collateral mortgage). Some lenders provide adjustable terms and others are variable terms.

I had an adjustable rate and a variable rate mortgage at the same time from 2 different lenders...which is where it confused me when one went up with rate hikes while the other one did not. The lender calls the adjustable rate mortgage as a variable mortgage in their emails. I had no idea variable (which does not increase payments) was a thing since I always had adjustable (termed as variable) before.

It shouldn't be a thing. Tons of Canadians will be in for a nasty surprise come renewal, especially as a number of lenders did not force payment adjustments on trigger rates being hit.

IMO the terms are counter-intuitive, too.

To me, variable implies...variance, as in your payments could change all over the place.

Whereas 'adjustable' implies moreso background changes, like amortization period 'adjustments'.

Of course it's the other way around. But maybe that's just me.

[MillerTime GFG]

Originally Posted by powderjunkie

IMO the terms are counter-intuitive, too.

To me, variable implies...variance, as in your payments could change all over the place.

Whereas 'adjustable' implies moreso background changes, like amortization period 'adjustments'.

Of course it's the other way around. But maybe that's just me.

Lol...I think of it the opposite way. Adjustable, as in your payment gets adjusted as prime rate changes. But I get your point.

[MillerTime GFG]

Some bad news out of the US today, which is good news for interest rates, and bond yields have dropped significantly today because of it. Largest drop I've seen in quite some time.

JOLTs report came out. Less jobs being created, and less people quitting their jobs because it's harder to find a new one.


In Canada, the signs are very similar to what is happening in the US, which is no surprise. BMO and Scotia reported quarterly results today. Provisions for credit losses and bad loans on the rise.

https://www.reuters.com/business/finance/bank-montreals-quarterly-profit-falls-higher-bad-loan-provisions-2023-08-29/

At Scotiabank, provision for credit losses jumped to C$819 million from C$412 million.
"We are closely monitoring customer behavior and have observed a very rational and responsible shift in spending as households manage through this period of reduced discretionary income," Scotiabank CEO Scott Thomson told analysts.
"We are seeing the impact of recessionary conditions, which are reflected in our elevated provisions," Thomson said, highlighting its international business

It'll be interesting to see what this means for the BoC meeting on the 6th.

[tvp2003]

I had never even heard of an "adjustable rate" mortgage until I read about it on CP a few years ago. In my mind there were only two options:

- fixed rate mortgage -- obvious, the rate is fixed
- variable rate mortgage -- the rate is variable and therefore your payments are variable

[MillerTime GFG]

Originally Posted by tvp2003

I had never even heard of an "adjustable rate" mortgage until I read about it on CP a few years ago.

It's mostly monoline lenders that have ARMs as opposed to VRMs. Big banks typically are VRMs. Monolines such as First National, MCAP, etc.

I'm assuming you have had your mortgages with a bank? Or whomever set up your mortgage didn't explain the difference.

[indes]

I've still got 3 years left at 1.6% thank goodness. Will be interesting to see how this inflation thing plays out with the quickly changing world economics.

It will be interesting to see what Saudi Arabia does with the Petrodollar agreement once they're in BRICS. If the world continues to de-dollarize won't that lead to some serious inflation in the US?

[tvp2003]

Originally Posted by MillerTime GFG

It's mostly monoline lenders that have ARMs as opposed to VRMs. Big banks typically are VRMs. Monolines such as First National, MCAP, etc.

I'm assuming you have had your mortgages with a bank? Or whomever set up your mortgage didn't explain the difference.

For the most part, yes. Although I think it worked out for the best -- being on a VRM helped me to realize that my personal risk tolerance (at least when it came to mortgage rates) is not very high.

IMO being on a "variable" mortgage takes away those incremental jumps (at least psychologically -- your payment doesn't go up but each one will undoubtedly cost you in the long run), especially when rates had been so low (and relatively stable) for so long...

[blankall]

Originally Posted by opendoor

Yeah, Q1 2022 to Q1 2023 saw the biggest drop in inflation-adjusted prices in the last 50 years (and probably long before then too):

https://fred.stlouisfed.org/series/QCAR368BIS

However, because rates have gone up so much, affordability has worsened. But when rates are lowered (and they will be when there's a slowdown), then affordability will start to improve.

It's unlikely we'll get back to the lowest mortgage payment-to-income ratios from past eras, as increasing income inequality will prevent that (basically, the median income for homebuyers will stray further from the median income for workers). But I do think we'll see an improvement. It was already happening in 2017-2020 until COVID hit.

This is the way it pretty much always is. Whenever there's a drop in prices, it's typically accompanied by another factor that erodes affordability. Whether it's a massive increase in interest rates or a massive amount of job loss.

By it's very nature, a fall producing affordability almost never happens, except in situations where there's an excess of housing or people are forced to sell off in huge numbers.

I'm not as optimistic as you about affordability, because I see a massive shortage that's only getting substantially worse.

[Azure]

45k workers left construction in Canada the last month or two, so yeah, thinks are not getting better at all.

Big demand for housing, no solutions to make it more affordable.

[opendoor]

Originally Posted by blankall

This is the way it pretty much always is. Whenever there's a drop in prices, it's typically accompanied by another factor that erodes affordability. Whether it's a massive increase in interest rates or a massive amount of job loss.

By it's very nature, a fall producing affordability almost never happens, except in situations where there's an excess of housing or people are forced to sell off in huge numbers.

I'm not as optimistic as you about affordability, because I see a massive shortage that's only getting substantially worse.

For the people who lose their jobs, yes. But that's usually only about 4-5% of the labor force and only temporarily. But in the aggregate, affordability improves significantly in those situations. Look at the huge swings from peak to trough in this chart:





On a national basis, it went from ~73% in 1981 to 40% 5 years later (45% drop). And in 1990 it was 60% but dropped to ~35% 8-9 years later (42% drop). So I don't really see why it couldn't drop from its ~66% peak to the more affordable 40-45% range it was pre-COVID in the coming years.

People keep saying this time is different, but we've had similar population growth before. In the late '80s, the population was growing at a similar rate to now and then housing construction completely tanked, dropping by almost 50% to about 120K a year by the middle of the '90s. You would think that would be a recipe for skyrocketing prices, but the opposite happened and it ushered in a decade and a half of very cheap housing.

You would be surprised what a chilling effect that a few years of stagnant prices can have on housing speculation. I remember my parents buying a rental house in the early '00s that had a 12% cap rate and it had been sitting on the market for 6 months. And that was after about 20 years of relatively slow housing construction.

[Firebot]

BoC holds rates

https://www.bankofcanada.ca/2023/09/...se-2023-09-06/

With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.

Not unexpected considering Canada is likely in recession territory once current quarter numbers show. That said, we are a full 50 basis points behind the US, and with our economic growth diverging, the CAD will continue to weaken, causing further inflationary pressure which will likely force the BoC's hand to do at least one rate hike by the end of the year.

[bizaro86]

Interesting piece in the NY Times about how housing in Tokyo is very affordable.
https://www.nytimes.com/2023/09/11/o...o-housing.html

[blankall]

Originally Posted by bizaro86

Interesting piece in the NY Times about how housing in Tokyo is very affordable.
https://www.nytimes.com/2023/09/11/o...o-housing.html

That's paywalled. But it's well known that there are two major differences in Japan:

1. They do not have a rapidly expanding population and take on very few immigrants. This is likely to, however, cause all sorts of much more disastrous economic effects, as the population continues to shrink. The population of Japan has been shrinking for about 1.5 decades and this process is expected to accelerate.

2. Japan has extremely practical zoning and building laws. The average house in Japan lasts 20-30 years, depending on the materials its constructed from. People are simply allowed to build new buildings without being dragged down with red tape. The country also zoned the entire country into 1 of 12 zones and allows any kind of building that complies with the zoning to be built within each zone, without some crazy permitting system. There are no town hall debates about building a skyrise. If the (very broad) zoning and market conditions allow it, the build is a go.

[opendoor]

Originally Posted by bizaro86

Interesting piece in the NY Times about how housing in Tokyo is very affordable.
https://www.nytimes.com/2023/09/11/o...o-housing.html

I don't know, isn't that kind of glossing over what is probably the biggest factor? Japan has a declining population which is currently lower than it was in 1990. It's not particularly hard to have relatively affordable housing with a declining population.

[accord1999]

I also think the bursting of the Japanese housing and asset bubble is a factor as it reminds people, even 30 years later, that housing isn't always a good investment and prices can go down.


For too long now in the hot Canadian markets, it's always been prices going up and you have to buy now or you'll be priced out forever.