{"id":10562,"date":"2017-03-16T10:31:41","date_gmt":"2017-03-16T14:31:41","guid":{"rendered":"http:\/\/www.zoocasa.com\/blog\/?p=10562"},"modified":"2017-03-16T10:31:41","modified_gmt":"2017-03-16T14:31:41","slug":"will-us-fed-rate-hike-mean-higher-canadian-mortgage-rates","status":"publish","type":"post","link":"https:\/\/www.zoocasa.com\/blog\/will-us-fed-rate-hike-mean-higher-canadian-mortgage-rates\/","title":{"rendered":"Will the US Fed Rate Hike Mean Higher Canadian Mortgage Rates?"},"content":{"rendered":"

It isn\u2019t just rapidly heating real estate prices barring some buyers from the housing market<\/a> –\u00a0 a trend of rising rates is underway south of the border with implications for Canadian mortgages.<\/p>\n

The U.S. Federal Reserve (the American counterpart to the Bank of Canada) announced yesterday a hike to its trend-setting interest rate by a quarter of a per cent, from 0.75% to a full 1%.<\/p>\n

The move was justified by a strengthening American job market and improving inflation according to the statement released by the Fed<\/a>:\u00a0\u201cThe stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2% inflation.\u201d This is the second time the U.S. Fed rate has been hiked since December, with another two upward moves widely expected 2017.<\/p>\n

Signalling a Stronger U.S. Economy<\/h2>\n

The Fed\u2019s move is a signal it no longer needs to rely on ultra-low interest rates for economic recovery. \u00a0But what will this rate increase mean for Canadians, who have also enjoyed record low borrowing rates since the financial crisis?<\/p>\n

The likeliest outcome is that the fixed cost of borrowing will rise says CanWise Financial President James Laird, who points to the resulting sell-off occurring in the bond market.<\/p>\n

\u201cThe quarter-point increase in the U.S. Federal interest rate typically results in the same increase for fixed rate mortgages here in Canada, which we should expect to see in the coming weeks,\u201d he says, adding that new mortgage premium increases also taking effect this week will be a double hit to borrower affordability. \u201c(This is) adding to a prospective buyer\u2019s total monthly carrying costs and making the mortgage amount a buyer can qualify for incrementally less.\u201d<\/p>\n

Will The Bank of Canada Follow Suit?<\/h2>\n

While fixed rates are poised to rise, it\u2019s still unclear if the Bank of Canada will follow the Fed\u2019s lead with a hike of their own. Our central bank<\/a> has kept its trend-setting overnight lending rate at just 0.5% since July 2015, following two quarter-rate cuts in reaction to dropping oil prices. Prior to that, it had been held at 1% since September 2008 in efforts to keep credit and money flowing post-recession. In recent announcements, the BoC has taken a very dovish tone, saying that due to \u201cexcess capacity\u201d, cutting rates would be a much more likely tactic than raising them.<\/p>\n

And, while historically Canada\u2019s bank has mirrored the U.S. in terms of monetary policy, several recent statements made from its governor and deputies indicate that isn\u2019t necessarily the case now. \u00a0In January, Governor Stephen Poloz stated that the BoC will “continue to run an independent monetary policy, anchored by our inflation target of two per cent,” even if it resulted in a lower Loonie.<\/p>\n

The Pressure to Keep Pace<\/h2>\n

However as this divergence widens, pressure is mounting on the BoC, says Laird. \u201cAn increase like this in the U.S. does place more pressure on the Bank of Canada to make a move, but for now we still expect to see our key overnight rate remain at 0.5%.\u201d\u00a0 He adds that as fixed mortgage rates become less of a bargain, demand\u00a0will grow for variable-rate options, especially if the BoC intends to keep their rate low. \u201cIf that remains true, a fixed rate increase will widen the spread between fixed and variable rates in Canada so you can expect variable rates to rise in popularity in 2017,\u201d he says.<\/p>\n

The bond market, which sets the trend for fixed-rate borrowing costs, seems to be leaning toward upward movement from the BoC, with two-year bond yields<\/a> hitting two-year highs and overnight swaps pricing in a 51% chance of a hike by December.<\/p>\n

Rising Rates, Rising Prices: CREA<\/h2>\n

News of potentially higher mortgage rates is accompanied by fresh data from the Canadian Real Estate Association, whose February numbers<\/a> show the average home sale price is up 3.5% nationwide. While some markets are showing stronger growth than others, CREA reports upward movement in 70% of housing centres, with the Greater Toronto Area driving the bulk of growth.<\/p>\n

\u201cHousing market trends continue to differ by region. Homes are selling briskly throughout the Greater Toronto Area and nearby communities,\u201d stated Cliff Iverson, CREA president. \u201cElsewhere, competition among potential buyers is less intense, so listings take longer to sell.\u201d<\/p>\n

CREA adds to other associations\u2019 concerns of tight housing supply as listings declined in over a third of markets including in the Prairies, Ontario and Atlantic regions \u2013 in fact, the number of homes available for sale fell 25% and is at its lowest level since 2001.<\/p>\n

Gregory Klump, CREA\u2019s chief economist, says lack of options are driving the bidding war culture prevalent in the Toronto real estate<\/a> market. \u201cIn and around Toronto, many potential move-up buyers find themselves outbid in multiple-offer situations amid a short supply of listings. As a result, they aren\u2019t putting their current home on the market,\u201d he stated. \u201cIt\u2019s something of a vicious circle from the standpoint of a supply shortage and a challenge for first-time and move-up buyers alike.\u201d<\/p>\n

CREA reports that prices for two-storey homes saw the greatest year-over-year gains at 17.9%, townhouse prices rose 16%, one-storey homes by 15%, and apartment units by 13.7%. The average national sale price is now $519,521, and would be only $369,728 without the Vancouver and Toronto markets factored in.<\/p>\n","protected":false},"excerpt":{"rendered":"

It isn\u2019t just rapidly heating real estate prices barring some buyers from the housing market –\u00a0 a trend of rising rates is underway south of the border with implications for Canadian mortgages. The U.S. Federal Reserve (the American counterpart to the Bank of Canada) announced yesterday a hike to its trend-setting interest rate by a […]<\/p>\n","protected":false},"author":39,"featured_media":10563,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jnews-multi-image_gallery":[],"jnews_single_post":[],"jnews_primary_category":[],"footnotes":""},"categories":[468,33],"tags":[],"class_list":["post-10562","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mortgages-2","category-real-estate-news"],"yoast_head":"\nWill US Fed Rate Hike Mean Higher Canadian Rates? | Zoocasa<\/title>\n<meta name=\"description\" content=\"The latest US Fed rate hike will translate into rising mortgage costs for Canadians, say experts. 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