Brokerage president on market uncertainty

"Certainty and stability come back once the Bank has reached its stable point for the current environment"

Brokerage president on market uncertainty

Canada’s housing and mortgage markets continue to grapple with the recent onset of a rising-rates environment – and some degree of real estate uncertainty looks likely to continue until the country’s central bank deems hikes to its benchmark policy rate are no longer necessary, according to a prominent mortgage executive.

James Laird (pictured), co-founder and president of the CanWise Financial brokerage, told Canadian Mortgage Professional that clarity for buyers and sellers in the housing market would only arrive once the Bank of Canada reaches its target destination on that trendsetting interest rate.

“I think the real estate market will be unstable, like it is right now, until the rate policy stabilizes – until we get out of 50-basis-point [increases] every month,” he said. “We’re going to need some stability to bring back understanding of the real estate market because right now there’s a real disconnect between buyers and sellers.

“No-one really knows what they should be selling a house for right now, so there’s just a lot of uncertainty and lack of understanding and, to me, certainty and stability come back once the Bank has reached its stable point for the current environment.”

The Bank of Canada raised its policy rate to 1.5% at last week’s rate announcement, marking its third consecutive increase and a second successive “oversized” (more than 0.25%) hike.

Citing inflation that’s expected to move even higher in the short-term and an economy that’s operating in excess demand, the Bank’s Governing Council said that interest rates would need to rise further in the coming months, although it gave no clear indication what those hikes would entail and how quickly it intends to raise rates.

Read more: Bank of Canada announces another oversized rate hike

The endpoint of the Bank’s planned trajectory on interest rates should give buyers and sellers alike a better idea of where they stand in Canada’s housing market, Laird said.

“To me, the quicker the Bank gets to where it wants to be in the current inflationary environment, the better it’s going to be just [in terms of] stability and understanding of market dynamics for everybody,” he said. “It can just bring clarity to the market.”

Part of the current uncertainty stems from a lack of clarity on whether the Bank plans to continue moving in 50-basis-point increments on its rate hikes or if it could introduce an even larger increase in its next policy rate announcement, scheduled for July 13.

CIBC World Markets’ deputy chief economist Benjamin Tal told CMP last week that the Bank had sounded an emphatic note on its rate policy, leaving the door open for a potential 0.75% hike in July by stressing its willingness to act forcefully on rate increases. “We’re talking about a very aggressive Bank that means business – no question about it,” he said.

Laird also detected “strong language” in the Bank’s latest announcement, saying that while continued 0.5% hikes remained its most likely path in the months ahead, larger increases couldn’t be ruled out if inflation continues at its current elevated, and persistent, levels.

Read more: 'Aggressive' BoC could be readying even larger rate hikes, says CIBC economist

“I was curious to see if they would forecast where we’re going to end up and they didn’t really do that. They just said more, strong rate hikes are to come,” he said. “My takeaway was [a further increase of] 50 basis points feels certain at the beginning of July, the next announcement. Seventy-five (75) would still be possible if inflation between now and then runs even hotter than it’s been. I think they’ll keep looking at data as they choose between 50 and possibly 75.”

Most holders of variable-rate mortgages, which fluctuate in line with the key central bank rate, have seen their monthly payments increase in recent months, with that trend likely to continue as the Bank’s benchmark rate continues rising.

That only reinforces the importance of ensuring that borrowers are fully educated on their mortgage type and have factored in the possibility of higher payments, said Laird.

The good news for those considering or already a holding a variable rate is that even after this most recent hike, those rates are still low compared with pre-pandemic levels – and it continues to be considerably easier to qualify for variable than fixed rates because of the current stress test rules.

“Anyone with a variable-rate mortgage, I would hope by this point, would be aware of what’s happening and be expecting this and further rate increases,” Laird said. “The hope and advice is that those borrowers have budgeted for this, are prepared and can handle this.”