Canadian Mortgage Rate & Realty Trends

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Sources: Stats Can Mortgage Data, CREA

Overview of Canadian Mortgage & Realty Market

Mortgage rates are a critical factor for homeownership, and understanding the trends and changes in mortgage rates is crucial for making informed decisions. Over the last 20 years, Canadian mortgage rates have seen significant shifts due to various economic factors. In this article, we will explore Canadian mortgage rates’ trends over the last two decades and their impact on the Canadian real estate market.

At the start of the 21st century, Canadian mortgage rates were relatively high, with a five-year fixed mortgage rate hovering around 7.25%. In the early 2000s, the Bank of Canada began a series of rate cuts in response to a global economic slowdown. By 2004, the five-year fixed mortgage rate had dropped to 5.24%. The housing market was growing as a result of low-interest rates, and this encouraged many Canadians to buy homes. In 2008, the global financial crisis hit, causing a recession that led to an economic slowdown worldwide. As a result, the Bank of Canada lowered its benchmark rate from 4.5% to 0.5% in just over a year. This move led to a further decline in mortgage rates, with the five-year fixed mortgage rate hitting a record low of 2.99% in 2012.

The ultra-low interest rates seen in the years after the financial crisis had a significant impact on the Canadian housing market. A massive influx of buyers flooded the market, leading to a housing bubble in some cities. Home prices skyrocketed, and homeownership became increasingly unattainable for many Canadians. In an attempt to cool the housing market, the government introduced new mortgage rules, including reducing the maximum amortization period from 40 years to 25 years.

By 2017, Canadian mortgage rates started to increase gradually. The Bank of Canada began to raise its benchmark interest rate, which had a trickle-down effect on mortgage rates. The five-year fixed mortgage rate climbed steadily, reaching 3.49% by the end of 2017. In 2018, the Bank of Canada continued to raise its benchmark rate, which pushed mortgage rates higher. By the end of the year, the five-year fixed mortgage rate had risen to 5.34%.

In 2019, Canadian mortgage rates saw a bit of a reprieve, as the Bank of Canada held its benchmark rate steady. The five-year fixed mortgage rate decreased slightly, ending the year at 5.19%. However, the COVID-19 pandemic hit in early 2020, and the Bank of Canada cut its benchmark interest rate to a record low of 0.25%. This move led to a further decline in mortgage rates, with the five-year fixed mortgage rate hitting 1.99% in the summer of 2020.

The COVID-19 pandemic had a significant impact on the Canadian housing market, with many Canadians reevaluating their housing needs. As a result, there was a surge in demand for homes in suburban and rural areas, leading to a shortage of housing supply in these areas. This trend led to a further increase in home prices, making homeownership even more unattainable for many Canadians.

In Canada, the housing market is divided into two segments, the primary market, where new homes are built and sold, and the secondary market, where existing homes are resold. According to the Canadian Real Estate Association (CREA), in February 2022, the national average home price rose by 34.2% to $802,725, from February 2021.

The Canadian housing market is experiencing a shortage of available homes for sale, with supply issues caused by low inventory and long wait times for permits to build new homes.

One of the main factors contributing to the high demand for homes in Canada is the low-interest rates offered by the Bank of Canada, which has kept borrowing costs low, encouraging Canadians to take on more significant amounts of debt. As a result, Canadians are now taking on more debt than ever before, with household debt-to-income ratios rising to record levels.

The Canadian government has implemented several measures to address the housing affordability crisis, including the introduction of stress tests for mortgage applications and the implementation of a foreign buyers tax in some markets. The stress test requires borrowers to demonstrate that they can still make payments on their mortgage if interest rates were to rise significantly, ensuring that borrowers are not over-leveraged and can afford their homes. Meanwhile, foreign buyers’ taxes aim to curb foreign investment in the Canadian housing market, which can drive up home prices and limit supply.

Despite these measures, however, the Canadian housing market remains in a state of flux. Some experts predict that the housing market may experience a correction in the future, with home prices declining as demand decreases, and supply increases. In contrast, others believe that the market will continue to grow, driven by demographic changes and increased demand for housing.

One trend that is expected to shape the future of the Canadian housing market is the aging of the baby boomer generation. As this generation ages, they are likely to sell their homes and downsize, creating a significant supply of homes on the market.  The Canadian government has acknowledged the challenges facing the housing market and has taken several steps to address them. In October 2021, the government announced a plan to invest $4 billion over four years in affordable housing, with the aim of creating up to 100,000 new affordable homes across Canada. The government has also announced plans to introduce a national tax on vacant homes, which is expected to increase the supply of homes available for sale.

In conclusion, the Canadian housing market is facing significant challenges, with limited supply and high demand contributing to rising home prices and a lack of affordable housing. While the government has implemented measures to address these challenges, including stress tests and foreign buyers’ taxes, it remains to be seen whether these measures will be sufficient to stabilize the market.