Canada has been one of the true stars of international economics over the last decade. While other countries slipped and fell in terms of GDP and employment, they have continued to remain stable.
So when the mortgage rates here, which can be influenced by what is happening next door in the United States, remained low after an especially torrid year in real estate, the question that was asked by many was ‘when the rates start to rise again, will they continue to rise over the long term’?
According to Richard Crenian’s post about Foreign Interest in Canadian Real Estate, the long term trends are favorable for foreign investment to continue, keeping the upward pressure on interest rates over time. Of course, as founder and president of ReDev Properties Ltd, Richard Crenian is well-respected within Canada.
Housing Starts Up
One of the primary measures of how the real estate market is doing is the number of housing starts that are occurring regionally and across Canada. Last year, the housing start numbers increased again, with a great deal of the investment interest coming from abroad. The nice thing for Canadians is that the housing starts are distributed fairly evenly among the provinces, with a couple of areas of larger growth moving from region to region over time. Additionally, the forecasts continue to get better. The number of housing starts expected in 2015 across Canada rose another 5,000 units from August to September of this year.
Conversely, the number of mortgage defaults has declined further, continuing a trend of static or declining numbers for a number of years.
Bond Market Returns Stay Down
Another factor that is closely watched by those tracking Canadian mortgage rates is how stable the global and regional bond market rates are. The interest is there because when the situation is in flux globally, as it is today, all major lenders are impacted because the bond market is one source of borrowing for financial institutions.
It may take at least another year for the bond market to return to historical norms when it comes to providing a yield for investors. In the interim, the cost of providing money will remain low enough that keeping the interest rate low on the loans that banks make will continue to be attractive.
What is the Impact of Continued Low Rates?
Low interest rates normally allow young couples and other potential home buyers to:
- qualify for more home than they would otherwise because the payments will be lower when interest rates are lower.
- actually qualify if they were not eligible before because their fixed payment will be considered to be within their ability to pay by banks and other financial institutions.
In addition to providing a larger pool of qualified potential homeowners, low interest rates make it easier for builders to speculate on homes by borrowing, building and then selling. Typically speaking, in addition to there being a sweet spot in the market for builders to finance new housing developments, there is also a point in the mortgage interest rate market where if the financial environment is in question, the number of builders that are speculating on homes can become a factor in how strong a rate correction is down the road.
For those who are involved with business, commercial rates often mirror residential lending rates to a degree. Continued low residential mortgage rates can therefore mean that there is more commercial lending opportunity going on for business expansion, creating in turn more employment opportunity and therefore more upward consumer pressure on the housing start numbers.
The environment in government can also impact the direction of mortgage interest rates. If regional governments such as the city of Edmonton continue to operate in the black because their local economy is doing well, mortgage rates will be impacted because employment stability is higher under those conditions.
Overall, the future continues to look rosy for Canada. Its ability to weather one of the worst financial storms of the last 100 years without losing too much momentum is a classic example of a well-managed economy that is relying on sound economic principles to move forward and attract investors.