The popular theory on why home prices have yet to respond in a big way to lower mortgage rates is that we need deeper reductions to improve affordability.
Mortgage rates have come down from around 6 per cent to the mid 4 per cent zone – how much more do we need to get buyers to step up? Rates of 3.9 per cent or better would do the job, a recent note from BMO Economics says.
A 3.9 per cent mortgage rate plus a 30-year amortization brings us back to pre-pandemic levels for mortgage payments as a percentage of household income, BMO said. From 2004 through 2020, mortgages ate up between 30 and 37.5 per cent or so of household income. A jump in mortgage rates took that level to around 50 per cent, and falling rates have trimmed it back to around 40 per cent.
Mortgage rates below 4 per cent would also attract investors, BMO said. At current rates, the math of real estate investing doesn’t make much sense.
Mortgage rates are influenced mainly by what’s happening in the bond market, which has lately been mulling over the resilience of inflation in the U.S. economy. Bond prices have fallen, which pushes up yields. In this environment, lower mortgage rates are unlikely.
While we wait for lower mortgage rates, home prices have been falling in expensive cities like Toronto and Vancouver and moving higher in other spots. For example, the average resale price in Calgary last month was up 6.4 per cent to $582,100, while Halifax was up 2.7 per cent to $538,100.
If lower mortgage rates revive sales, expect widespread price gains that undercut the benefits of borrowing costs. This raises a question for buyers: Wait for those lower mortgage rates, or wade into a market where soft prices may encourage sellers to deal.
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Personal finance do-overs
The Stress Test personal finance podcast for Gen Z and millennials wants to know: What’s the worst personal finance mistake you’ve made, and how did you get out of it? If you are between 18 and your early 40s, please take the following quick and anonymous survey.
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Rob’s personal finance reading list
Top choices in a dozen credit card reward categories based on voting by RewardsCanada users. If there’s one card that pops in these lists, it’s TD Aeroplan Visa Infinite. Also interesting to see a few challenger banks making the rankings, notably Koho and Neo Financial.
A report on how people in search of more affordable housing have changed life in the Atlantic provinces, and how happy they are with their choice. A nicely balanced piece.
Money advice for twentysomethings
A financial planner’s advice for people in their twenties includes this vital point – “don’t muck up your credit.” Maintaining a good credit score has never been more important than it is today. Landlords and prospective employers may look at credit scores as well as banks and other lenders.
The juice on keeping grapes fresh
Tips to keep grapes fresher, longer. Everyone has a few examples in their head of food prices that exploded in recent years – one for me is grapes. No wonder people at the supermarket are half-emptying bags of grapes before buying.
Ask Rob
Q&A
Q: I just completed a trip to New Zealand and Australia. I enjoyed everything except all purchases on my cashback credit card. Was negated by a 2-per-cent charge added to each transaction. I thought you would like to know that.
A: Almost all credit cards apply a foreign transaction fee when you make a purchase outside Canada. You can get around this by using a card with no foreign transaction fees, or a prepaid card issued by alternative financial institutions like EQ Bank and Wealthsimple.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Tools and guides
The U.S. Financial Industry Regulatory Authority created this website to help people make smarter investing decisions, i.e. not get carried away by trends of the moment.
Calling small-town and rural first-time buyers
If you’ve bought, or are planning to buy your first home outside of a big city, journalist Kelsey Rolfe wants to hear from you. She’s working on a Globe and Mail story about what the mortgage options are for small-town and rural first-time buyers. Reach out to her at kannerolfe@gmail.com.
In the social sphere
Social media: Ramit Sethi is one of my favourite personal finance people because of insights like these.
Watch: A discussion on why young adults in particular are feeling overwhelmed by debt.
Money-Free Zone: A short video of Isaac Hayes in the studio working on the funk anthem, Theme to Shaft. Because I know you’ll wanna, here’s a link to the whole song.
ICYMI
More PF from The Globe
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- Why I’m not giving out candy bars for Halloween