28 Mar
The recent pandemic and the current housing situation of Canada have caused a frenzy in the mortgage market in Canada due to low interest rates, higher disposable income, and increased investment in the housing market. Furthermore, the Bank of Canada introduced its first interest rate increase in March and there is a hint that the second interest rate hike could be as soon as April.
According to Robert Kavcic, “We’ll probably have about seven rate hikes and that will take us back to where interest rates were before the pre-pandemic. After that, it’s open for debate.”. Although the mortgage market is driven by several factors, some of these factors were unique to the pandemic. As such, following are some of the factors that are potentially changing the dynamics of the mortgage market.
Reversal to Suburban Areas
Over the course of the pandemic and the recent housing purchase frenzy, the majority of buyers are now purchasing homes outside urban areas for the purpose of having more space and increased privacy. As a result, locations like Bancroft and North Bay have perceived an annual home-price surge of 64% and 48%, respectively.
One of the reasons why the majority of the homebuyers were buying property outside of urban is that it consists of more green space and has a lower population density. Also, single-family homes are expensive in urban areas, while, for the same price, a buyer can get a bigger home with extra land in suburban areas. Moreover, it is also imperative to highlight that in some areas the trend for buying a detached home is decreasing, while for some areas the trend for buying a condo is on the rise.
Decreasing Consumer Confidence
In accordance with the consumer confidence report published by Nanos, it is reported that during the different waves of Covid-19, consumer confidence was in a steep decline. The reason for this decline is that managing economy is a confidence game.
Furthermore, with such rapid sale and purchase ongoing in different real estate markets of Canada, the overall supply of housing remains low. Even if new housing supply comes into the market, they are immediately purchased by homebuyers who have been waiting. In addition, since one rate hike has already been perceived, another rate hike will be coming soon, and this factor decreases the confidence of the consumer when applying for a mortgage.
More Investors Than Homebuyers for Mortgages
Another factor that is changing the dynamic of the mortgage market is that there are more investors in the mortgage industry than there are homebuyers. During the course of the pandemic, a report was published by the Bank of Canada that there were three categories of homebuyers – first-time homebuyers, repeat homebuyers, and investors.
Investors currently account for 20% of home purchases in Canada, with a slight increase by repeat homebuyers overtime. The share of first-time homebuyers has been declining since 2015, however, because of the current housing market situation, even first-time homebuyers are making significant efforts to ensure they become eligible for property under their name. It is also important to note that since 2015, the disposable income has not increased in a significant manner as compared to the average home price. As a result, even today’s homebuyers have difficulties in purchasing a property with a 20% down payment.
Since investors tend to be in greater debt than traditional homebuyers, there is potential for even greater pressure in the mortgage market.
