ASK THE EXPERT: The Future of Mortgage Rates and the Canadian Real Estate Market

Alyssa Furtado
by Alyssa Furtado December 8, 2011 / No Comments

Ratehub procured an exclusive interview with Dr John Andrew, esteemed Professor at the Queen’s School of Urban and Regional Planning (SURP) to get his thoughts on the state of interest rates, the Canadian economy, and the housing market.

On Tuesday, December 6th, 2011, the Bank of Canada announced that the key interest rate would remain at 1.00%. Were you surprised by this? How long do you think the Bank of Canada will keep the key interest rate at 1.00%?

I was not surprised at all as most everyone predicted this is what the Bank of Canada would do. In terms of how long this trend will continue depends a lot on the economic recovery of the foreign markets. There are a lot of European concerns right now. We’ll have to wait and see how they do.

When do you predict rates will move?

My assumption is by the April or June 2012 interest rate meeting. But, it wouldn’t surprise me if the central bank kept the key interest rate the same for a few months beyond that. I feel it will be a rate increase after that time because if they wanted to cut the rate, they would’ve done it already. If they wanted to cut the rate, the best time to have done it was the last interest rate announcement.

Some economists are predicting a rate increase of 1.00% by 2013 for a benchmark overnight rate of 2.00%. Would you agree?

To say how much exactly is too difficult to predict, anything 12 months out is too far, but we can expect to remain in a low interest rate environment for the next two years. It’s going to be a long, slow global recovery.

What are your thoughts on the state of the Canadian economy?

We are experiencing slow growth and recovery which is impacted by global economies. Their economic clouds still hang over us.

Historically, variable mortgage rates have been shown to be less expensive over time versus fixed rate mortgages. Is it still a good time to get a variable rate mortgage? Or is now the time for fixed rates?

You are correct when you say that variable mortgage rates have been shown to be less expensive historically, but we are not in average conditions right now. I think I’d be happier seeing people opt for a fixed rate. With a variable right now, there is more risk than usual. We will see an increase in variable rates.

So what you’re saying is that the market has “bottomed out” right now and the only place to go is up?

Exactly.

Do you think that long-term interest rates are inflating real estate market (prices)?

I think there might be an influence, but there are other factors too. No question that there was a surge in demand from first-time home buyers this year. How many first-time home buyers are still out there? How is demand?

I think the market is poised for a self-correction. There hasn’t been a correction for the natural increase in prices we are seeing.

Are there people waiting for a correction?

The short answer is “yes”. When we start to see Bank of Canada raise their rates, we will see a small downturn in pricing. House prices will not only level-off, but we should also see a decline in house pricing of 5.0 – 8.0%. It’ll probably happen quite quickly. The market should self-correct.

Is Canada in a housing bubble?

No. In Vancouver it may be possible, but it’s based on perspective and how you define a “bubble”. They (Vancouver) will see a greater correction more so than anywhere else in Canada. It’s no secret that a lot of the money that is buying property is coming from foreign investors (everyone and their grandmother is talking about that). The portion of buyers that are off-shore investors are buying property with cash. They are not sensitive to market rates.

What about Toronto? Will there be too much supply to meet demand?

Developers have a history of grossly overshooting demand. So probably yes, the question really is when. Right now the GTA economy is quite diversified and healthy, but if interest rates go up, people could be priced out of the market and start moving out of the downtown condos. Also, rising interest rate will affect first-time home buyers or new immigrants since they will be priced out of their first home.

What are your thoughts on the US and Europe which play a role in dictating the pace of the Canadian economy?

The US housing situation stayed bad for far longer than I would’ve guessed, especially in the southern United States and the second homes market. It looks like it’ll be years of recovery for them.

In terms of Europe, it seems it’s a game of which country is next? It’s a very difficult situation to assess, but this situation is dampening Canada’s economy.

 

We’d like to thank Dr. John Andrew for his time and valuable insights. For more information regarding the Bank of Canada’s interest rate announcement, check out our Blog. Dr. John Andrew is the founder and director of the Queen’s Real Estate Roundtable which is a national non-profit organization that brings together 25 of the most significant companies in the real estate sector for the purpose of advancing and sharing industry practices and issues of common interest.

Website: www.queensu.ca/q25