TORONTO — Potential homebuyers spurred into action by fears of an imminent interest rate hike may be better off to wait and avoid bidding wars that can prove even more costly, according to credit experts.
Laurie Campbell, executive director of Credit Counselling Canada, says Canadians already feeling societal pressure to be homeowners are more likely to engage in bidding wars and overspend when they hear that their ability to fulfil that “North American dream” could soon erode.
“Our goal is to be homeowners and you better do it quick, you better get in the market quick because otherwise you’re not going to get in,” she said.
“Especially right now with this whole time bomb of interest rates, for sure there’s a lot of people out there thinking they better get in the market today.”
Campbell said she is concerned because people are getting into the market prematurely and may not see the repercussions of high debt levels for a few years.
“We may have a ripple effect of this recession a couple years down the road with people in these homes that they can no longer afford.”
She suggested that consumers who haven’t planned how they’ll afford an overpriced home should wait until prices drop, even if it means taking on a higher interest rate.
The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.
The Bank of Canada is expected to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.
Economists predict the hot housing market will give way to more subdued activity in the second half of the year, when higher interest rates set in.
BMO’s senior economist, Sal Guatieri says that with a cooler housing market around the corner, “prudence may be a good choice for many new entrants.”
The cost of servicing a mortgage fell 5.8 per cent in February as a result of record-low interest rates. But with many Canadians taking on ever larger mortgages in expensive markets across the country, higher rates could create problems for some.
Two bank surveys released Wednesday found that potential homebuyers are feeling pressure to buy homes sooner, but were worried about their ability to pay when mortgage rates rise.
The Bank of Montreal said as many as one-third of respondents in a survey of homebuyers believed that their expectation that housing prices would increase, and interest rates would soar, had made an impression on their decision to make a purchase in the short term.
About 15 per cent of potential homebuyers said they had been in bidding wars and, for those who had their bids rejected, 14 per cent believed it caused them to overspend on their next offer.
Meanwhile, Royal Bank’s annual home ownership survey found about 64 per cent of mortgage holders are concerned about higher rates over the next year. Almost three-quarters of homeowners, 73 per cent, felt strongly that homebuyers needed to think ahead to ensure they will still be able to make their mortgage payment if rates rise.
The bank said six in 10 mortgage holders said they had taken advantage of current low interest rates to pay down more principal on their loans.
Laura Parsons, a mortgage specialist at BMO, said she is seeing an increased sense of urgency to buy and an influx of first-time buyers.
She said many buyers can get caught up in the emotions of buying a home they are not capable of paying for.
“They may (find) . . . a house that they can’t even afford and they’re bidding on it and then when they find out they can only afford a . . . (less expensive) house they’re disappointed,” she said.
Adam Finn, a business professor at the University of Alberta who specializes in consumer behaviour, says talk of looming interest rate spikes is driving people who were saving to buy in a few years to rush into the market early.
“Nobody thinks it would be a mistake to do it now because interest rates could get lower…negative rates would have to be in existence for it to be any lower, so all they know is that rates are going to be higher next year or the year after….so that does put pressure on people to think about buying.”
Finn added that consumers who think about locking in their own low mortgage rates and engage in bidding wars don’t think about how they’re contributing to driving up the price of an average home.
“(But) No one wins by saying I’ll do what’s in the interest of society and not bid up the price on this particular property (because) by doing that they’ll let somebody else get the house,” he said.