Stars align for Canada’s new home buyers

If you listen to recent warnings a meteor is headed straight for the Canadian housing market.

The Canadian Real Estate Association was the latest to sound the alarm this week cutting its forecast for home sales and prices after reporting a 5.8 per cent drop in sales over the MLS system from July to August.

House prices still gained four per cent on average in August compared with August of last year but the rate of growth is definitely slowing down. Add that to repeated warnings that mortgage rates are heading up from Finance Minister Jim Flaherty and the Bank of Canada's Governor Mark Carney and it seems like housing Armageddon.

Not quite. In fact, the stars could be lining up for new home buyers who can scrape together a good down payment.

Bubble - what bubble?

The term bubble has been thrown around quite a bit. Housing data is normally presented as a national average. The bubbly aspects might apply to the fastest growing markets in Vancouver and Toronto — specifically, the condo market. Even then the rate of growth in those markets pales compared with the too-much, too-soon increases in some of the hardest hit U.S. housing markets before that meltdown. Toronto and Vancouver aside, homeowners in places like Fredericton have little to fear.

And if you view your home as a long-term investment, you're likely going to sleep even more soundly at night. According to the Canada Mortgage and Housing Corporation the average home in Canada appreciates in value by an average 5.7 per cent annually over a forty year period. House prices have been appreciating at a faster pace over the past decade and it's estimated even a 4 per cent gain — or even negative growth going forward -- for the next few years should sustain that average.

First time home buyers in the driver's seat

Tighter mortgage requirements imposed over the summer and a moderate slowdown in the housing market means lenders will need to compete for a smaller pool of borrowers. Price declines could even lower the threshold for new home buyers.

At the same time mortgage rates appear to be stuck in the mud for a long time. The U.S. Federal Reserve has frozen its benchmark lending rate near zero until at least mid 2015 as the economic recovery becomes more and more elusive. The Bank of Canada has been holding its benchmark rate at 1 per cent for more than two years. Despite repeated warnings of impending rate hikes, it is unlikely Canada's central bank will make a move ahead of our biggest trading partner.

Low central bank rates mean low borrowing rates for the banks, which gives them the ability to pass those savings along to the mortgage borrower.

Spread the wealth

Recent history shows banks have room to do just that. According to data compiled by mortgage broker, Mortgage Intelligence, the difference between the rate mortgage providers pay to borrow and what they charge borrowers is higher than normal.

Variable, or floating, interest rates are based on the bank's prime lending rate, which is loosely based on the Bank of Canada benchmark rate. Borrowers in good standing can get a variable rate mortgage right now at about 0.35 per cent below the prime lending rate of 3 per cent.

That discount to prime has been falling but has not yet returned to the 0.95 per cent low shortly after the 2008 financial meltdown.

Homeowners with big mortgages should note that an unexpected rebound in the economy could prompt the Bank of Canada to hike its rate to combat inflation, which could boost variable mortgage rates — and that could be a huge strain on a household budget. To get an idea, a 2 per cent increase on a $250,000 mortgage will result in a monthly increase of around $300.

The safe route

Homeowners can avoid variable rate risk by locking in their mortgage rates for a fixed term.

Unlike variable rate mortgages, which move with the Bank of Canada, fixed rate mortgages are tied to the bond market. Banks borrow from the bond market and make their money on the difference, or spread, from the lending rate.

That spread is also historically wide. Before the meltdown it was between 0.75 per cent and 1.25 per cent. According to Mortgage Intelligence it is currently 1.35 per cent.

Borrowers who lock in can get a five-year mortgage at 2.99 per cent and a 10-year mortgage at 3.79 per cent — a rate that would make the previous generation gush with envy.

With all that profit margin room for banks, borrowers have the power to negotiate the best rate. There's nothing like the threat of a mortgage broker to help your bank see things your way.