How will RBC’s mortgage rate hike impact the Canadian housing market?

canadian-home-winterPhoto: Maëlick/Flickr
Even if Canada’s other big banks follow RBC’s recent mortgage rate increases — which came into effect today — with similar hikes of their own, it won’t have a substantial effect on the housing market, says one economist.
“I would suggest [the impact] would be marginal at best,” says Brian DePratto, an economist with TD Bank, in an interview.
“We’re still talking about extremely, extremely low interest rates by any historic precedent,” he adds. “Whether it’s 10 or 15 basis points here or there, I don’t see this as having any kind of major impact.”
RBC’s hikes are across several mortgage types, including two, three, four, and five-year fixed-rate mortgages, the rates for which increased 10 basis points, as well as five-year variable mortgages, which rose 15 basis points.
A consumer with a five-year fixed-rate mortgage on a home costing $456,186 — the most recent average Canadian home price, according to the Canadian Real Estate Association — will end up paying about $23 per month more, or $276 annually, now, the Toronto Star reports, as a result of the new rate of 3.04 per cent for these mortgages.
In an emailed statement to BuzzBuzzHome News, Erica Nielsen, RBC’s vice president of home equity financing, listed the reasons for the bank’s adjustments.
“The changes we’ve made to our residential mortgage rates reflect a number of factors (beyond the bond yield) including changes in market conditions driving increased short term funding costs and long term / wholesale funding costs,” she wrote.
Mortgage rates generally follow Canadian bond yields, says DePratto, the TD economist. “You kind of build your bonds out of mortgages within the mortgage market, so ultimately those mortgages become bonds,” he says.
“So when that market moves, people who are building those products, they need to reflect pricing that’s in line with those market moves.”
But these lending-rate changes come at a time when bond yields are dropping. DePratto says a recent Canada Mortgage and Housing Corporation (CMHC) move is a major factor for some mortgage rates not reflecting lower bond yields.
“There’s always unique pricing issues, but I think one of the core things are the changes to CMHC rules around securitization — so additional fees for mortgages coming out of CMHC,” he says, referring to changes CMHC detailed last month alongside increasing the minimum down payments on some mortgages.
“That’s sort of being wrapped into that overall price in a sense.”