Homeowners suffer a lot as interest rate raise from 0.25% to 4.5% in one year
In the heady days of February 2022, the GTA’s record high home values peaked. For the first time in history, detached houses in the City of Toronto were selling for more than $2 million on average — about $400,000, or 23 per cent more than just a year earlier.
Many Canadians were feeling flush, having banked a few bucks of federal pandemic relief and the savings from the lower cost of working from home.
Borrowing money had never been cheaper. For two years, the Bank of Canada had held rates at an historic 0.25 per cent, fuelling the housing euphoria.
An entire generation had never seen a serious decline in home values. The housing market, particularly in the GTA, felt like the world’s best bet, and authorities did little to discourage that view.
One year and eight interest rate hikes later, and the once fevered financial climate has turned frosty for many households.
New homeowners, having achieved their dream, are plagued by shame and fear because they bought around the market peak that, in retrospect, seems like the worst possible time. Higher borrowing costs have also wiped out any advantage of fallen home prices for those looking to purchase.
Savings accumulated by the pandemic have evaporated; high household debt levels have barely budged; and variable rate mortgages have added hundreds of dollars to some households’ monthly payments.
Meantime, the cost of homeownership, from property taxes to utilities, is rising. Water, fuel and electricity were 12.4 per cent higher in Ontario at the end of December than they were a year earlier, according to the Statistics Canada Consumer Price Index (CPI). Household furnishings were up 6 per cent.
The City of Toronto is looking at the highest property tax increase in decades this year – a 7 per cent hike that will add $233 to the average homeowner’s bill.
It all adds up to many households starting the new year under financial seige.
The stress is showing in rising numbers of consumer insolvencies, said Laurie Campbell of Bromwich + Smith, a licenced insolvency trustee. Insolvencies were up 10 per cent annually at the end of November, the highest they have been since the start of the pandemic in March 2020.
You don’t need to have a variable mortgage payment to feel the impact of the housing crisis, she said. Even if you don’t own a home, the last year has seen double-digit rent hikes. Then there’s inflation. It has dropped from 8.1 per cent in June to 6.3 per cent at the end of Dec. but “to me that is not a win,” said Campbell.
“I don’t think many employers are giving 6 per cent increases this year. I’m hearing about a lot of wage freezes or 1- to 2-per cent increases. So how are people bridging that gap?”
“People aren’t sleeping well at night and that’s truly the bottom line,” she said.
That’s particularly true of first-time home buyers who purchased around the market peak in late 2021 or early 2022.
If you bought a $1 million home in January 2022 with 20 per cent down and a five-year variable rate of 1.4 per cent, you would have expected a monthly payment of $3,222, according to Ratehub.ca. With Wednesday’s eighth Bank of Canada increase since March — another .25 points — that payment has grown to $5,049 a month, a 57 per cent jump that would add $21,924 a year to the mortgage cost.
First-time homebuyers have always been stressed but those who purchased around the market peak and chose a variable rate loan are likely feeling the most strain right now, said James Laird, co-CEO of Ratehub.ca.
“We can’t fault them because at the time, our own central bank was telling us that rates are going to stay low for the foreseeable future and home prices are going to go nowhere but up. That was the common thinking,” he said.
The Bank of Canada officially announced in January 2022 that it was ending its “exceptional” low interest policy and it noted inflationary pressures, but it seemed few Canadians were prepared for rates to rise so high so fast.
“At least if you took a fixed rate you got to take advantage of that additional four years from today,” said Laird.
The majority of all Canadian mortgage holders — 69 per cent — had fixed rate loans last year, according to Mortgage Professionals Canada’s (MPC) annual consumer survey. Twenty-five per cent had variable-rate mortgages that rise and fall along with the central bank rate.
But when it came to new mortgages last year, only 56 per cent were fixed rate, compared to 62 per cent in 2021.
MPC spokesperson Cecely Roy said that Canada Mortgage and Housing Corp.’s Fall Residential Mortgage Industry Report showed a shift in the kinds of loans borrowers chose last year. In January, 57 per cent of new mortgages were variable rate plans. By August, when interest rates were already climbing, that had declined to 44 per cent.
John Pasalis, head of real estate brokerage, Realosophy, is active on Twitter and has a YouTube channel where he answers real estate questions. He says social media has been unkind to people who are already stressed by the downturn in housing. It’s not uncommon for peak period buyers to be painted as stupid, greedy or the cause of the market correction.
That’s particularly true of those who bought investment properties, he said.
“These people are just families. They’re not sophisticated. They thought it would be a good investment because everyone says real estate’s a good investment. So they invested and now it’s weighing on their finances and they don’t know what to do. They can’t easily sell because now (the property) is worth less,” he said.
Oakville’s Melody Wong isn’t worried about added costs when her fixed rate mortgage eventually comes up for renewal. She expects that the $600 a month she saves on commuting costs because she now works from home, will help backstop any increase. As the mother of four boys, 6 to 15, she is, nevertheless, acutely aware of rising costs.
She and her husband recently purchased a hybrid van to save on gas and Wong says their grocery bills have doubled. “This is not even about the kids growing and eating more now,” she said. “Literally, it’s the cost of the products.”
She is relying on more canned foods and letting her kids fend for themselves occasionally with the instant ramen noodles they love.
Wong, whose boys are in Scouting and soccer, is a Scout leader herself. She says fundraising activities aren’t as successful for extra-curriculars in the current climate and parents, who themselves are stretched, are being asked to contribute more for camps and activities.
“With the rising cost of groceries and other materials, we’re having to put that on the parents to say, ‘We’ve been fundraising, we’re not getting as much but we need you to pay.’ There are families that are struggling. So that’s the challenge we’re faced with,” she said.
First-time homebuyer Gurcharan Rehal agreed in October 2021 to pay $1.959 million, plus $90,000 in upgrades, for a single-detached home that would house himself, his wife, their two children and his mother.
“We thought, if we live hand-to-mouth, we can still afford it,” Rehal said, an Uber driver who also earns income as a property manager and from a business in India.
But with his closing date approaching, he’s so far been unable to secure a mortgage.
An appraisal recently estimated the home’s value at $1.7 million — more than $300,000 less than what he agreed to pay for it. On top of that, he says the mortgage rate he was pre-approved for would have required monthly payments of between $5,500 and $6,000, but now he’s being quoted amounts between $12,000 and $15,000 per month.
Coming up with hundreds of thousands of dollars to cover the difference upon closing — in addition to the $260,000 down payment he’s already made — and making exorbitant monthly payments is something his family simply can’t afford.
“Me and my wife, I think we haven’t slept for the last three months,” said Rehal. “Our kids, they can see the stress on me and my wife’s face.”
“We are not able to eat, we are not able to rest,” said Poornima Malisetty, who purchased a detached home in the Paradise Valley Oak community with an in-law suite for $1.9 million that’s now being appraised at $1.6 million.
“Even if we win a lottery, we will not be able to close.”
Condo buyers are facing similar issues and developers are also feeling the pinch of a challenging market.
The buyers would like to extend their closing dates or reduce their purchase prices, and have protested outside the developer’s sales office.
Ricardo Tranjan, an economist and senior researcher with the Canadian Centre for Policy Alternatives, says non-profits and their clients are among the most vulnerable to collective belt-tightening. But he acknowledged that homeowners, faced with rising costs, may also be accessing those services.
He doesn’t blame the City of Toronto for imposing an historic tax increase this year of all years. The problem, he said, is that Toronto taxes have been too low too long. That has left community organizations and their clients in peril.
“At the provincial and federal level there are more things that can be done,” said Tranjan.
“The financial situation of the province is in good shape compared to the city of Toronto,” he said. Yet social assistance rates remain shockingly low.
Ottawa has stepped up with pandemic and daycare funding. The latter has offered some families relief but that is likely being offset by the rising costs of mortgages, rent and food.
The struggle many households are confronting now is also debt driven, says insolvency expert Campbell. In 1990, Canadians owed 90 cents for every dollar they earned. Now they owe about $1.84. People held onto their debt during the pandemic when there wasn’t much collections activity. Now, creditors want their money.
She points out that “tackling mental health and finances, unfortunately, are very closely connected.”
If there is a light at the end of the tunnel, it’s that in the bigger picture, the majority of people still have fixed-rate, five-year loans, said mortgage expert Laird.
“For most households, especially for first-time homebuying households, their income situation usually improves on average quite significantly over that five years.
And most people should be able to renew their fixed-rate mortgages in five years unless there has been a divorce, job loss or serious health issue that would cause a household to be financially strained regardless of the rate environment, said Laird.
“As long as our job market stays OK, that’s probably the key correlating factor with whether defaults dramatically rise or not.”
This article was reported by CBC and the Star.