RBC Mortgage Rates Bad News for Canada’s Housing Bubble
On Tuesday, January 5, Royal Bank of Canada (NYSE:RY), one of the country’s biggest financial lenders, said it would raise its interest rates on several mortgages starting this Friday. Could this rise in RBC mortgage rates disrupt Canada’s housing market and mark the beginning of the end for the Canada real estate bubble?
According to a statement by the Royal Bank of Canada (RBC), the bank’s special offer rate for its five-year fixed mortgage will rise one-tenth of a percentage point to 3.04%, effective January 8. The five-year variable rate would also be increased by 0.15% to prime—0.10%. (Source: “RBC Royal Bank Changes Residential Mortgage Rates,” Royal Bank of Canada, January 5, 2016.)
The rates on two-year, three-year, and four-year fixed rate mortgages will also be increased by 0.10% to 2.39%, 2.74%, and 2.84%, respectively.
RBC is not the only lender to raise mortgage rates. Bank of Nova Scotia (NYSE:BNS), another major lender in Canada, decided to raise interest rates on its fixed-rate products in December 2015. (Source: “Royal Bank Raises Mortgage Rates as Yields Decline,” Bloomberg, January 5, 2016.)
Raising interest rates on mortgages would be in line with the government’s effort to cool down Canada’s housing market. Last month, Canadian Finance Minister Bill Morneau announced that starting February, the Canada Mortgage and Housing Corporation (CMHC) will require homebuyers to put a 10% down payment on the portion of any mortgage it insures of more than $500,000. Right now, buyers are only required to put down a minimum of five percent to qualify for CMHC’s insurance.
The Finance Minister points out two markets in particular, Vancouver and Toronto: “We recognize that, specifically in the Toronto and Vancouver markets, we have seen house prices that have been elevated,” said Morneau. “We want to make sure we create an environment that protects the people buying homes so they have sufficient equity in their home.” (Source: “Bill Morneau Tightens Mortgage Rules on Homes over $500K,” CBC News, December 11, 2015.)
Indeed, 2015 has been a phenomenal year in Toronto’s real estate market. According to the Toronto Real Estate Board, home sales reached a new record in the Greater Toronto Area (GTA). In calendar year 2015, there were a total of 101,299 sales reported in the GTA, a substantial 9.2% increase compared to the year before. (Source: “Record TREB MLS Home Sales in 2015,” Toronto Real Estate Board, January 6, 2015.)
Note that in 2015, the average selling price of all properties in the Greater Toronto Area (GTA) was $622,217—a whopping 9.8% increase from 2014’s average selling price of $566,624.
With real estate momentum going strong into 2016, it might take more effort to cool down Canada’s housing market bubble.