Media coverage of a new study by the Canadian Association of Accredited Mortgage Professionals (CAAMP) has focused on the fact that close to half a million homeowners could have difficulty meeting their payment obligations if their mortgage rate rose to 5.25%. That’s based on a simulation run as part of the study.
Yesterday, I spoke with Will Dunning, who works for CAAMP on a contract basis as its chief economist. His read of the simulation is considerably more optimistic than the headlines suggest. Of the 475,000 who reported they may have difficulty paying a 5.25% mortgage, about 275,000 have variable rate mortgages. “I don’t believe that variable rate mortgages are going to 5.25% anytime soon,” he told me. “Personally, I don’t see it in any timeframe that matters.”
Dunning disagrees with many forecasters who see rates rising sharply in the near term. “The recovery, such that it’s been, has been quite tepid in most parts of the world,” he said. “They may adjust upwards, but we’re talking in the range of a point or less over the next year.”
He says this downturn was exceptional. “This is a different character of recession than we’re used to seeing in our lifetime. This is one of those very rare events that does a lot of damage, and it takes a long time – a very long time – to repair that damage. You might say the recession is over, but the recovery’s got an awfully long way to go.”
A few highlights from the CAAMP report:
- On a scale of one (meaning very negative) to 10 (very positive), respondents reported an average scoring of 6.32 to the question: “Is now a good time or a bad time to buy a new home in your community?” This is down from scores recorded by CAAMP in both the spring and fall last year. But it’s higher than the average response given in the five prior studies.
- When asked: “How likely are you to purchase a new property in the next year,” just 3.4% answered with a score of nine or 10 (meaning very likely).
- Half of respondents said they expect home prices in their community to rise to some degree in the next year. Only 7% said they believe prices will fall during that period. Dunning’s view is that “our housing market in Canada probably is peaking right now.” He predicts a “minor” correction, “rather than one that causes a huge shock to confidence.”
- Seven in 10 respondents think mortgage rates will increase in the next year. Just 2% believe they’ll fall.
- There are about 9.3 million homeowners across the country. Roughly 5.6 million have mortgages, with an average outstanding principal of $138,000. Those mortgage holders have an average $159,000 worth of equity in their homes.
- Of the mortgages negotiated in the past year, 65% are fixed, 29% have variable or adjustable rates and 6% are combination mortgages.
Dunning’s view on the fixed versus variable mortgage debate is simple. “A person who is young and inexperienced, and doesn’t have a lot of room to absorb increases in their payments will choose – and should choose – to go for the lower risk option of a fixed rate mortgage,” he told me. “People taking the variable rate mortgages are mostly older, experienced borrowers.”
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