There’s so much misleading garbage written on the internet about Canada’s housing market…it leaves me shaking my head.
I just read a piece by a well-known YouTuber that’s trending on LinkedIn about rising interest rates. Why do we see such negative news?
Because it’s great bait! Bad news attracts an audience like nothing else. Like bees to honey.
In order not to get sucked into the negative news vortex, you must ask some basic questions about the material you’re reading. So let’s put on our critical thinking hat for 2 minutes and dissect this YouTuber’s blog post. I’ll show you, line-by-line, what I’m thinking as I read through this gentleman’s post.
And if you disagree with anything I write, say so. I can be wrong, but I don’t think I’m wrong about this.
The well-known commentator starts, “There are growing concerns about the state of variable rate mortgage holders across the country. At this point, nearly everyone who’s on a variable rate mortgage has essentially hit their trigger rate. It’s become front page news, and rightfully so.”
Okay. So what are the growing concerns? Are we concerned they’ll all default and thereby crash the market? And if that’s the case, why hasn’t the market already crashed since the Bank of Canada started raising rates in March of 2022?
Couldn’t one reach the opposite conclusion? Isn’t it a sign of the underlying strength that the Vancouver and Toronto real estate markets are at all-time highs amid 10 rate hikes since March 2022?
In fact, after home prices tailed off last fall, they rebounded in the spring of 2023 to near record highs amid interest rate hikes not seen in 40 years.
Doesn’t that suggest that buyers are able to afford higher rates and home prices?
The YouTuber continues, “Unfortunately this story isn’t going away anytime soon, as Tiff Macklem and his second at the BoC look poised to jack rates another 25bps this week. The market is placing nearly 60% odds of a rate hike, while 20 of 24 economists polled by Reuters expect a hike on July 12th. That would push the prime rate to a dizzying 7.2%.”
Done. The BOC raised rates. By the way, why should we care what 20 out of 24 economists predicted? Since when are economists right?
How many economists correctly predicted today’s interest rates two years ago?
Remember how economists said inflation was supposedly “transitory” in early 2022? Then the language shifted from “transitory” to “entrenched” and rate hikes followed. The economists and experts were writing the script as they were going along.
While we’re on predictions, remember how the CMHC (Canada Mortgage Housing Corporation) predicted in May 2020 that home prices could fall by 18%? Boy, was that way off the mark!
We saw home prices rise 40% in some Canadian markets because of rock-bottom 2% interest rates. I had a client get a 1.69% rate in June of that year.
It reminds me of Burton Malkiel’s theory that blindfolded, dart-throwing monkeys will outperform stock-picking experts on Wall Street. The truth is that economists, financial advisors, and not even Realtors like me can predict the gyrations of financial markets in the short run, and you’d be crazy to put much stock into their prognostications.
Hence, you must ask critical questions about the news you’re reading.
The YouTuber continues, “The feds knew this was going to be a problem. Remember the March 2023 budget?”
Nope. I don’t remember the budget. What specifically are you referring to?
He writes, “Right on cue. Here’s the official message from The Financial Consumer Agency of Canada (FCAC) this past week. Basically, The FCAC wants banks to work on amortization extensions, waive lump sum prepayment fees, waive prepayment fees on distressed sales, and waive interest on capitalized interest.”
Finally, some meat on the bone… Waiving lump sum pre-payment fees, as they do in the US, seems like a no-brainer. Why can’t we do that here in Canada?
Extending amortizations is already the case in many countries. Finland has 60-year amortizations, and Switzerland and Japan have 100 years of amortizations (intergenerational mortgages).
Didn’t Canada have 35 amortizations? Why did we get rid of those?
The YouTube continues, “Remember, 56% of all new mortgage originations in January 2022 were variable rate. Ouch.”
Ouch indeed if you’re on Scotiabank’s variable with no fixed payment! How many of that 56% were with Scotiabank?
Canada’s other 4 big banks all have fixed payments, so some variable rate holders may just now be hitting their trigger rates. And what then?
Throw the keys on the table? No!
You have options. You could increase your monthly payments. You could pay down some principal owing on the mortgage.
Here’s the bait. It’s the line that gets you biting your fingernails and fearing that the housing market will crash: “Remember, 56% of all new mortgage originations in January 2022 were variable rate.”
Hey, what about the stress test? How come no one mentions that anymore?
Wasn’t that meant to add a built-in buffer for mortgage holders so that they could support payments if rates went higher? By extension, wasn’t that buffer supposed to help protect the Canadian housing market from exactly this type of situation?
The stress test required buyers to show they could support payments on rates 2% higher than their qualifying rate. In other words, if you were qualifying at 3.8%, you needed to show that you could support payments if rates rose to 5.8%.
Granted, variable rates are now higher, but homeowners like you and me also had the option of breaking their mortgage, paying the penalty, and rolling into a lower 3 or 4-year fixed. How many people did that?
I did. I bit the financial bullet. Ask me how if you’re curious.
Anyway, he continues, “Basically Tiff Macklem needs to tank the economy, and quickly, in order to bring interest rates back down to more manageable levels. Unfortunately, we’re waiting for those signals to show up in lagging data.”
No, he doesn’t need to tank the economy. He wants to get inflation under control; ideally back to 2% levels.
High inflation acts like a tax. It erodes the buying power of your money and slowly makes your money worth less. It can also destabilize societies like Weimar Germany in the 1920s or handcuff economic growth like in Argentina.
No one wants to tank the Canadian economy. And with record low unemployment and a strong labor market that doesn’t appear to be the case, anyway.
Dear reader, please wear your thinking hat and ask critical questions about what you’re reading; otherwise, you can drown in misinformation.
Start by questioning the assumptions, then question the facts themselves as I did above.
As a marketing strategy, though, the negative tone of this blog post is ingenious. Talking about real estate in the negative, as if the sky is falling, attracts attention–even if it’s done in a subtle fashion with factoids sprinkled into the body of the piece.
After all, who wants to hear from a Realtor like me that home prices will slowly climb over the next 8 years? That’s boring optimism.
Thanks for reading.
And do share your personal stories on how rising rates are affecting you. I would like to know.