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Real Estate News: Interest hikes could shock mortgage holders

December 10, 2009

Interest hikes could shock mortgage holders

(Source: CBC News )

Homebuyers could be lulled into taking on larger mortgages than they can handle because of continued record low interest rates, says the C.D. Howe Institute.

The Ottawa-based public policy think-tank says many economists, including its own, are predicting rate hikes as much as a full percentage point or more later next year.

“Does the simple experience of short-term interest rates being so low, for so long, encourage people to mortgage themselves more than they otherwise would, and buy a bigger house than they otherwise would ? and get themselves into trouble longer term?” said C.D. Howe president and CEO William Robson.

The council said the central bank should give a strong signal that an eventual overnight rate move may be quick and large. It also suggested the bank rein in the housing market by raising the required down payment on government-insured mortgages.

Risk of a Real Estate Housing Bubble


Robson believes the Bank of Canada’s preoccupation with the high exchange rate is encouraging people to think the overnight rate is going to stay low longer.

“The Bank of Canada’s OK with that because they see that as important to stimulate the economy. But if you look at the housing market you have to wonder, are we seeing too much of a good thing?” he said.

“In the next 12 to 18 months, it’s likely that rate is going to start heading higher and it’s going to have an impact on those consumers who have short-term variable rates and home equity lines of credit,” Muir said.

Robson said there is risk of a housing bubble stemming from interest rates set too low. “People are getting a little bit too used to this emergency low on the overnight rate,” he said.

Read the full article, “Interest hikes could shock mortgage holders” at CBC News (Dec 9, 2009).

2 Comments leave one →
  1. Dustin permalink
    December 10, 2009 1:29 pm

    With a possible bubble situation and the risk of interest rates going up, what approach is better, to buy now and lock in for a few years or rent for a few years and wait for the bubble to pop and then jump in?

    • December 11, 2009 10:11 am

      Dustin, thanks for the comment – great question! Ultimately, everyone’s situation will be a little different. Based on the fact that rates can only go up, the most important consideration now is buying with an equity position. Buying now at a lower long term rate at the best value must be weighed against the impact of waiting to see where real estate prices go in the next few years and then seeing where interest rates have ended up.

      I have had more questions like these lately and to me it is a good sign. I always caution my buyer clients to have patience in buying a home and never encourage them to get involved in emotional buying with bidding wars and multiple offers. There’s been so much of it lately, people have not put the financial realities first and have in many cases panicked and pulled the trigger on a new home or condo just because it’s all that’s available now. I have recommended to many of my older clients who are nearing retirement, semi-retired or more focused on planning for retirement to wait. Many of them are renting now and waiting for the turn.

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