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Scary Headlines and Simple Math

1/2/2018

Today's scary headline and body come from  Stress tests, foreign buyers and higher rates likely to impact housing market in 2018 (CBC).

"Higher rates

The stress tests are based on the notion that interest rates are set to rise, and there's ample evidence to suggest that's likely to come true.

After sitting on the sidelines for the better part of a decade, the Bank of Canada hiked its benchmark interest rate twice last year. "

After having a mini-panic attack, I looked into the data.

1. An interest rate increase of 0.5% in 2018 would increase payments on a $300 000 mortgage by only $80/ month. Honestly! Don't believe me? Use the mortgage calculator to your left or one found on every lenders web page.  I'll wait for you to get back.

..... Hmmm, $80/month isn't so scary after all.  And if your mortgage is higher that $300K? Do the math.  You'll still most likely be able to afford your house.

Rising interest rates are scariest for those living at the extremes and us Canadians tend to be a very conservative bunch. Conservative = boring majority not at high risk.  (#BoringIsTheNewSexy, #BorrowingLessThanWeCouldAffordTo).

        (Math side note: a 100% increase in rate only translates to about a 30% increase in payments! Painful, but doable for the majority.)

2. The BOC has only raised the rate by more than 0.5% in one year in the last ten years. (https://tradingeconomics.com/canada/interest-rate).  Yes, we've been spoiled with low interest rates.  I love this quote from the same article:

"(E)conomist Doug Porter at the Bank of Montreal says he expects the market will largely be able to withstand the impact of new stress tests, just as it has withstood other policy changes. 

"Canada's housing market has defied the incessant talk of its imminent demise for years," Porter said in a recent report. Which is why this year, he expects the housing market to "exceed expectations, even with the new tighter OSFI rules, yet again crushing the bears' calls, if not their spirits." ".

Doomsday has been predicted for ages and has not arrived. It probably won't arrive this year either.  Question the math in the headlines or have your friendly broker to explain it to you.  We are the experts.

Lisa 

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