Thoughts

September 20, 2024 | 14:15

Mortgage Rules and Rates: The 3.9% Solution?

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Canada announced modifications to various mortgage rules this week that will incrementally bolster demand. The changes, combined with quickly-falling mortgage rates, should set up firmer housing conditions by next spring if the economy holds up. The biggest changes (effective December 15, 2024) include a raised price cap for insured mortgages, to $1.5 mln from $1 mln; availability of 30-year amortizations for all first-time buyers (new and resale); as well as for all purchasers of new builds.

For the pockets of the market that this impacts, it amounts to smaller required downpayments and/or effectively a lower mortgage-rate equivalent. Some of this set of measures might be window dressing— for example, most pre-construction purchases already come with 20% down. Some of it will have a noticeable impact—for example, it should open up the $1-to-$1.5 mln single-family home segment to more buyers; and, pushing out an amortization from 25 to 30 years gives about 10% more buying power, or the equivalent of a 90 bp rate cut from a monthly-payment perspective. Note that first-time buyers in Ontario were roughly 22% of the market in 2023; and insured mortgages were 17% of activity in the past year. It’s not clear what the overlap is, but suffice it to say this is additional easing for the market overall, and serious juice for the $1 mln-to-$1.5 mln segment.

Indeed, rate cuts are coming in hot and are expected to continue steadily through next July. Five-year fixed mortgage rates are already sinking below 4.5% and, with 5-year GoC yields now at the lowest level since July 2022, we could be on a path to sub-4% mortgage rates in the near future. That appears to be a critical level for at least three reasons. Psychologically, sub-4% was the norm before this inflation episode and aggressive tightening cycle (remember that rates pushed to about 3.75% by early 2019). For buyers waiting for ‘rates to fall’, that could be a trigger. Meantime, affordability is still restrictive despite lower prices across many markets, but mortgage rates below 4% should allow more households to stretch into the market. In fact, if we plug 3.9% mortgage rates and a 30-year amortization into our affordability calculator, we get back into the realm of what was sustained pre-pandemic. Finally, investors have been absent from the market because the arithmetic surrounding cap rates, borrowing costs and risk-free returns no longer made any sense. But, with cap rates rising (toward 5% in the GTA depending on the class) and 10-year GoC yields now below 3%, that spread is nearing more normal levels. From a cash flow perspective, sub-4% borrowing costs would let investors build principal again.

All told, mortgage rule tweaks will encourage already-levered households to borrow more, for longer—a curious policy move for a market that has landed as well as anyone could have hoped for. In fact, assuming the economy holds its ground, the BoC easing cycle and market fundamentals could on their own set housing up for noticeably stronger conditions through next year