Canadian real estate prices are back to surging after a correction that barely lasted a year. However, the momentum carrying prices higher isn’t expected to last very long after the latest Bank of Canada (BoC) rate hike. RBC, the country’s largest bank, expects rising interest rates will throttle demand at a time when more supply is finally beginning to appear. The result will be a much more balanced market, helping to calm the credit-driven price growth that re-appeared with easing central bank expectations.
As long as banks keep extending amortizations, rather than forcing defaults, the market is going to stay high.
We’re seeing problems in other consumer loans, however:
I think extended amortizations applies to existing mortgages only. Those don’t directly drive the current prices up. New mortgages determine the current prices and as far as I know their amortization periods haven’t changed. If that’s the case and interest is going up, and prices are going up, then people must be putting more money into downpayments. Say for a sake of argument interest rose by 10x tomorrow. Buyers with mortgages would be able to bid dramatically lower given the same downpayment. And so the market prices will collapse. If at the same time banks extend amortizations to hundreds of years to keep people from defaulting, that won’t change that noone can afford to bid what they used to bid yesterday. Existing loan amortizations keep some of the supply from entering the market and that creates some upwards pressure however interest rates directly affect the maximum market prices (if incomes stay relatively stable). There may be one unit for sale in the whole market, if all the thousand bidders can only afford to pay $1 for it, it won’t sell for $10, no matter the supply.
Yup. The effect is indirect, but present.
The federal government manded in their recent budget that banks do whatever they can to keep people from defaulting.