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March 31, 2022 | Mortgage Math Matters

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

The Bank of Canada is now expected to hike the base interest rate by .50% at its next several meetings toward 2.5% by year-end. The bond market has sold off sharply to price in these aspirations, so fixed mortgage rates (priced off bond yields) are already higher. The mortgage math matters:

Before the pandemic, the median Canadian home price was $580,000 when record monetary and fiscal interventions pushed five-year fixed mortgage rates to 1.5%. A conventional five-year fixed mortgage payment at 1.5% (with 25% down) on a median-priced home was $1855 per month.

Fast forward two years, with the median Canadian home price now 52% higher at $880,000, the same five-year fixed mortgage rate is above 3.5%, and the monthly payment on that median home is now $3475–87% higher than in 2020.

Given the rise in 5-year Canadian bond yields to date, the five-year fixed mortgage rate should move above 4% shortly, and the monthly payment on that same median home price will be just over $3661 per month–a double from 2020.

Moreover, the bulk of Canada’s population lives in the Greater Toronto and Vancouver areas, where median home prices (condos and single-family houses) are now above $1 million, which means conventional 5-year fixed mortgage payments at 3.5% are north of $5200 a month from $3200 in 2020.

The spike in debt-service costs is already free-cash-flow-crushing. An inflating housing bubble enabled household spending and real estate speculation over the last decade. There is no way that a doubling in mortgage payments is not deleterious to those trends and housing-dependent economic activity.

Yet,  mainstream economic forecasters (most of whom work for banks and other lenders) are not pencilling in declining home prices nor rising unemployment as they forecast higher interest rates. BC realtor Steve Saretsky calls BS on this in his latest podcast.

The Canada 5 year bond yield is ripping higher. This is repricing mortgage rates across the country. We could see 5 year fixed rate mortgages north of 4% in the next couple of weeks. This will act as a brake on the housing market, and potentially worse if rates hold here for a period of time. Proceed with caution. Here is a direct video link.


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March 31st, 2022

Posted In: Juggling Dynamite

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