As we consider the recent CMHC warning about a likely 30% drop in Canadian home prices should interest rates rise significantly, we should consider this long term table from the Bank of Canada, showing 5 year mortgage rates since 1951. In short, no one should be surprised that mortgage rates today at 100 year lows, are likely to move ‘significantly’ higher going forward. Rates have always moved in secular periods that trend up for years following a sustained downward trend, and repeat.
CMHC found that just a 1% increase in mortgage rates would leave 1 million Canadian homeowners unable to maintain their mortgage payments (never mind other higher interest rate debts they are carrying). But a 1% increase from present levels would be very modest in historical terms. A much larger 50% rise that returns 5 year mortgage rates to the 5% range would be appropriate historically. Unfortunately the increased carrying costs would also be impossible for many of today’s highly indebted households to withstand.
Bottom line: higher credit rates going forward should be expected and factored into prudent financial planning today. Higher rates will be no black swan event–but entirely predictable.
CMHC warns rapid interest rate rise would cause ‘severe’ home price drop. Here is a direct video link.
Also see: Toronto home prices up over 50% in 12 months in GTA’s hottest neighborhoods.
Speculative madness is not sustainable or healthy for real households and the economy. The mean reversion costs will be painful and widespread.
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