United States Federal Reserve Chairman Ben Bernanke’s words last Wednesday are likely to go further in determining the immediate future of Canadian mortgages than anything originating domestically.
The Federal Open Markets Committee laid clear a path for higher interest rates in the U.S., which caused the 10-year treasury bond yield to hit 2.54 percent as of Wednesday’s close (an increase of 0.35 percent over the week). Canadian bond yields largely followed suit.
The Fed is signalling the end of easy money in the not-too-distant future and financial markets are showing signs of addiction withdrawal.
U.S. mortgage rates have risen to well over 4 percent, the highest in a year, since Bernanke began preparing the market for the Fed’s plans earlier in May.
While Bernanke is increasingly bullish about the prospects of the U.S. economy, he’s not overly concerned about the Canadian economy, which is not doing as well. But Canada is getting dragged along with the changes in the U.S., for better or for worse.
As equities, commodities, and corporate debt adjust to higher bond yields, particularly vulnerable are interest rate-sensitive assets such as real estate investment trusts (REITs). Canadian REITs have been crushed 13 percent since late May (an annualized loss of 80 percent).
And mortgage rates are going higher. In fact, the average for a five-year closed mortgage among the six main Canadian banks has climbed 0.1 percent to 4.26 as of Monday.
Markets are now implying a first-rate hike in Canada by the second quarter of next year.
The National Balance Sheet Accounts data released on June 20 showed household debt ratios falling for the second straight quarter in Q1. This is another thing that will please policymakers, as over-leveraging households have been a concern given how long rates have been kept low.
The household debt-to-income ratio fell to 161.8 percent. This fall, at the margin, helps reduce the risks to homeowners of rising interest rates and falling home values.
The slowing debt growth was largely driven by a mortgage credit growth, which only grew by 5.4 percent. This is the weakest pace since 2001.
Other debt growth, such as in consumer credit and non-mortgage loans, accelerated in the quarter but flies under the radar of mortgage credit growth.
The news wasn’t all rosy as the slower home price growth since 2012 has limited homeowners’ equity, which is near the lowest level since the early 1990s.
In other news, condo sales in the Greater Toronto Area fell 33 percent from a year ago, according to May data from RealNet. Unsold inventory hit new highs.
With higher mortgage rates already manifesting, Toronto’s condo market can’t be expected to do well given the additional supply coming to the market next year.