If you happen to watch recent news you may know that US decided to rise interest rates. It is not a huge raise. It is a tiny little hike just to give a cool shower. This small raise together with a proposal of lifting embargo on oil export made the USD stronger than Viagra. Since Canadian Central Bank historically always followed US rates, you may expect to see similar action in the land of timbits and maple syrup. But this time our central bank will have much tougher time to decide what to do (the deadline is January 20th, 2016). If it cuts rates CAD will slide down further and then you can as well use Canadian Tire money to buy your favorite Kraft dinner. If the Central Bank jumps on US bandwagon and hikes rates it will certainly hurt cash-poor owners of million dollar macmamsions. If it keeps rates unchanged it will most likely sustain Status Quo of the real estate bubble in Canada, since new down payment rules, pushed by Prince Justin, will have little effect on house horny buyers. The down payment hike applies only to the price difference between $500K and the next threshold, not the entire price as people would think. The new rule adds only about $20 to monthly mortgage payments on $600K house.
Rate hike, depending on its scale, may start a slow meltdown of the Canadian housing bubble or ignite a tectonic shift that will immediately wipe out inflated values of million-dollar shacks in Toronto and Vancity. This will cause massive defaults on mortgages and HELOCs as soon as next mortgage reset pops in a calendar. Indebted lemmings that pay 80% of their income for housing costs will certainly be crushed even by small rise of 1%-2% in mortgage rates. On top of this the previous federal government had capped CMHC’s insurance at $600 billion and this limit will be exhausted very soon since it reached $543 billion in 2014. Such event will make Trudeau 2.0 government so unpopular that he wished the Nannygate was the only problem.
The Central bank has three choices: sacrifice CAD in the name of inflated housing market and the T2.0 popularity, deflate housing bubble in the name of strong CAD, or do nothing: let the CAD slide down and the bubble grow. Regardless of the Central bank decision the magic threshold of $500K may turn many neighborhoods into very unpopular place to live in.
Toronto burbs are full of $500K+ cookie-cutter houses built on post-stamp size lots. Those neighborhoods are sad place to live: no trees, you have to drive everywhere, the only community center is developer-built gym and the only pub in the neighborhood is full of 60+ year old crowd: the only people who have some spare cash for a beer. If you happen to work in Toronto the commute on 401 takes about one hour in a good day. Sometimes you do not get to work at all because your 15- year old Kia breaks down before you reach Scarborough. You wish you had a batter car but you are already maxed out with the mortgage payments and property taxes. You can not take you squeeze out for a dinner because all you can afford are frozen onion rings in a corner store. Although life of house-rich cash-poor Canuck is already a pretty dim experience, it will only get worse if Central Bank jumps on a rate-hike bandwagon.
Although introducing new down payment rules is rather a symbolic gesture of the feral government it has already sent a chill wind across real estate business because it shows what may come next. Cheap money do not last forever as well as house prices do not go up forever.
If you plan to upgrade to bigger and more expensive house, hold on, wait for the bubble to pop. When rates goes up and lemmings can not reset their mortgages anymore then you will buy a nice place for a half price.
Until then… get yourself a nice ride so you can take your squeeze in comfort for a dinner.