Cooling off a hot housing market

Canadians still appear eager to jump into the country’s hot housing market even as mortgage rates begin to climb, but they would be wise to consider the possibility they could experience, if not buyer’s remorse, at least a borrower’s reality check down the road.

An estimated 375,000 mortgage holders in Canada are already having trouble making their monthly payments, while another 475,000 say they could be in the same boat if lending rates head to 5.25 per cent, according to a study released this week by the Canadian Association of Accredited Mortgage Professionals. That’s about 15 per cent of the country’s 5.5 million mortgage holders. At present, the average five-year rate among Canadian homeowners is 4.02 per cent. Banks have been raising their rates in recent weeks ahead of an expected hike in the prime rate—now at an all-time low of 0.25 percent—by the Bank of Canada next month.

But that hasn’t stopped people from continuing to rush into the market. Housing starts in April were up slightly, driven by a nearly 30 per cent gain in starts for multiple dwellings, which include high-rise condominiums in cities like Toronto. The reason? Rising house prices are pushing people into the cheaper condo market in big centres.

The concern is that a sizable chunk of borrowers—29 per cent—still have variable rate mortgages, some as low as 1.75 per cent. Those people could see their monthly payments soar as rates rise. The good news, says Jim Murphy, the president of CAAMP, is that many Canadians appear to be taking their mortgage responsibilities seriously, with some 13 per cent of borrowers making extra lump sum payments last year.

Experts are also somewhat optimistic. BMO chief economist Sherry Cooper said rising rates, stricter mortgage rules and the arrival of the harmonized sales tax in B.C. and Ontario in July should cool the market later this year. The hope is that cooling happens in time to prevent hundreds of thousands of borrowers from ending up under water.