Rising interest rates could trigger housing market collapse

Rising interest rates could trigger housing market collapse

Rising interest rates later this year could trigger Canada’s housing market to collapse, according to a new report by Capital Economics.
 
This is a sharp departure from most other forecasts that see 2011 as a steady year for housing. Capital Economics calculated Canadian home prices falling by about 25 per cent to even as much as 35 per cent over the next three years as the Bank of Canada starts to tighten its monetary policy.
 
Many predict the central bank to push the interest rate up to two per cent by the end of the year from its current one per cent mark, and that it’ll return to the 3.5 per cent normal level by the end of 2012.
 
“Even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances,” Capital Economics chief Canadian economist David Madani told The Canadian Press. “If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.” 

If prices did decrease by 35 per cent, the Canadian Mortgage and Housing Corporation (CMHC) could suffer losses of $10 billion as about 10 per cent of higher risk mortgages default.

Meanwhile, for the week of Mon. Feb. 7, TD, CIBC and RBC all raised their special mortgage rates.

44 Comments
  • Kim Gibbons 2011-02-05 2:38:27 AM
    This is a joke? The media loves to report based on inciting fear but to run with this piece is highly irresponsible. I would be greatly interested in seeing the logic behind these ridiculous numbers that Capital Economists (never heard of them before) have come up with. Are they going to tell us that the Earth is flat and we're to believe this as well? Stick to the facts, show us some tangible numbers to back their claims because a collapse of 25-35% across the board in Canada? I'm not buying it.
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  • Mary 2011-02-05 3:31:49 AM
    Is the sky falling too? Any decreases in home pricing will NOT happen all at once, it's a gradual process. At the end of the day, we all know it's important to discuss your own situation with a professional.
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  • Ken 2011-02-05 6:37:57 AM
    No Joke - this is a harsh reality. As interest rates have been falling, financial institutions have been quick to increase the amount of mortgage money that home buyers are "eligible" for..... and sellers have benefited from this inflated "perceived" affordability. On top of this, refinancing of mortgages (in a highly competitive financial services marketplace) for additional purchasing power has left way too many Canadian households with a mountain of debt that is generally financed over 25-40 years!!

    This last year of global economic challenges provided the opportunity for Governments to provide stimulus to help us all spend our way out of a financial crisis. Not only were the Fed & Prov Gov'ts spending like drunken sailors, however many Canadian's were blessed with an opportunity to refinance and spend some more via a new round of interest rate cuts. Ontario has the second lowest personal tax rate in Canada - imagine how a 3-5% tax increase will feel as we soon try to chip away at the monster deficit.

    The Future?? Rates can only go up, affordability indexes will decline as fast as they went up, and yes house prices will plummet. You do not have to be a seasoned economist to understand that a $250,000 mortgage (many folks are unfortunately higher than this) @ 7% over 30 years means that most young first time home buyers will have a hefty monthly mortgage right up until retirement. No time for kids....... who can afford them??
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