So, you think rates are gonna spike up this year? Who says?

 Here we go again…  The beginning of a new year, and the same annual forecasts for interest rates to go up!   Before I share my thoughts.. Here’s some of the recent headlines that I’ve seen….

• a report by CBC News sharing 4 ways to prepare.. including selling your home, waiting to buy and locking into a Fixed rate mortgage!    (Can you say panic?)
• Here’s another from The Globe and Mail telling us it’s “Bad News for Borrowers: The economy could improve this year”.  Really?  Tell that to the people in Alberta, Newfoundland and Saskatchewan.
• And this one from last week says Get ready for Interest Rate Shock in 2015.

Wow, reading this means rates are certain to up this year…right?  So let’s see.. we should sell our home, put off buying (yet again) and lock in our Variable rates into Fixed rate mortgages..

Now let’s look at the most recent headlines..

• Financial Post says Markets eye Bank of Canada rate cut for first time as oil rout damage deepens
• The CBC News put this out Interest rate hike: Why the Bank of Canada may hold off
• Financial Post put another article quoting Morgan Stanley..   Why Canadians can expect low interest rates for longer — much longer: Morgan Stanley
• And this latest one

Hard to know what to believe.   So, HERE’S MY  THOUGHTS ON WHERE INTEREST RATES ARE HEADED…

Personally, I can’t see them going up anytime soon.  Especially with the current price of oil dropping to the lowest level in 6 yrs..  Residents in Western Canada are nervous.  Consumer confidence in oil-producing provinces is falling.  But the low oil prices will also have a positive impact as shipping, travel costs and heating bills will decline.  That decline will put more $$s in the consumers pockets.  Consumers like to spend… so watch for some provinces, like Ontario, to show some benefits and lead the way in 2015.

Then there’s the latest bad news about Target closing all 133 stores across Canada.  Costing 17,000 jobs.  This headline will surely cause concern and some panic.   It will affect consumer confidence.  At least for a little while.

BOTTOM LINE… BAD ECONOMIC NEWS IS GOOD FOR MORTGAGE RATES.. IT WILL GENERALLY KEEP THEM LOW.   (Of course, I’m saddened to hear about job losses.  This is never good for those affected, their families and loved ones.  I’m wishing them success on finding replacement jobs very soon.)  

SHOULD YOU BUY, SELL OR WAIT?

Taking on a huge debt, like a mortgage, isn’t an easy decision.   But ask most homeowners or property investors how they’ve done over the last 5, 10, 15, 20 or 30 yrs and I think that most will say they’ve done pretty well for themselves.

Last month, I wrote about how waiting for the crash would have cost you 60% over the last 6 years.   If you listened to those ‘Experts’, you’re probably kicking yourself right now. (it’s probably cost them even more.. in some cases 100%)

Yes, there is some risk to buying a house.. Let’s look at REAL RISK that could affect your mortgage costs and house values:

• Risk of job loss (that’s the biggest risk).  Out west, in oil country, there probably will be some job loss… but we still aren’t sure how much that will be and how much of an impact that will have…
• Risk of inflation… the Bank of Canada target inflation rate is between 1% and 2%… with oil prices falling, there shouldn’t be any immediate concern about inflation.
• Risk that house sales could slow.   Watch inventory levels.  Right now, levels are low.  This makes it a sellers market.  Until you see inventory go way up, house values should remain the same or move up slightly. (check out the recent Royal Lepage report for house values)
• Risk of interest rates going way up… BUT here’s where the TRUE worries get mixed with FICTIONAL worries.  We aren’t concerned with small rate hikes… Did you know that Canadians MUST qualify at the BANK POSTED 5 year FIXED rate?.  That rate is around 2.00% higher than the ACTUAL client rate! … (I bet you don’t read about that in the media!?).  We ARE able to absorb rate increases.. It’s been factored in by Mortgage Lenders for years.

The reality is, that buying a home should be a long term plan... Forget HGTV and quick flip shows..  This is for seasoned buyers willing to accept the risk.   You should PLAN to own for 7 years… this will see you through any, up and down, economic cycle.  It will also amortize any acquisition and disposal costs (lawyer fees, realtor fees, land transfer taxes).

We SHOULDN’T  really care if the home value goes up or down significantly in the short-term.  Just like a stock or mutual fund or any investment, it should be made with a long-term outlook in mind.   Sounds pretty simplistic, doesn’t it?   But it really is that easy.

DO YOU REALLY NEED TO BUY AND SELL STOCKS FOR $5 A TRADE?

Look, can someone tell me why we need to have stock trades for $5 or $10 per trade?   Who is buying and selling that many stocks, that often?  Since when does any professional or experienced investment advisor recommend buying and selling that frequently?    None, that I know of..  And this is how you need to look at your real estate investment.   It has to be for the long-term…

Now, don’t get me wrong.  I’ve seen many of my clients buy and sell in 1 or 2 years  and make a nice profit.   Nothing wrong with that.   But they also went in with the plan of buying and being able to hold for a long term.

For me, buying and selling stocks in a day, or a week, or a month, is the same as gambling.  I put this in the category of buying a home with the intention of selling in one, two or three years.  It’s not practical to expect a good return on your investment.  You’re better off going to the horse races, having a great dinner with some friends, and make some bets.  Maybe you’ll win, maybe you’ll lose.. but at least you’ll have a good time!!… more fun than looking at a computer screen!

BOTTOM LINE

It looks like rates will stay low for some time to come.  We could even see the Bank of Canada drop their rate…  The stock market has been volatile.  There is concern about the economy.  This will keep rates low.  By the way, the 5 yr govt of Cda bond yield was 1.02%.. that’s down around 0.60% from last year, and it’s at it’s lowest level in several years.  Remember, 5 yr fixed rates rates are priced against the bond yields.

The govt has many tools at their disposal to help the economy.    We saw it happen in 2009…  They are monitoring it closely..   If home sales drop too quickly, we could even see mortgage rules loosened up…  Many experts (myself included) believe the govt went too far with the tightening or mortgage rules and CMHC insurance programs, secured lines of credit tightening, rental mortgage products, etc.

Don’t be completely surprised if the govt decides to ease up on those rules.     For now, enjoy these record low rates.  Spend wisely and don’t fear real estate.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca