Lower mortgage rates may be on the horizon, expert says

House hunters worried about being pushed out of the market by higher mortgage rates received a little good news this week.

The turmoil inflicted on world financial markets over the last two weeks is taking the pressure off bankers to raise interest rates, something that was expected to happen this fall.

“What everyone was anticipating before all this came to light was for mortgage rates to start to increase,” said Ryan McKinley, mortgage development manager for Vancity credit union.

But now, McKinley said, the credit union’s members sense the possibility that already low rates could even be heading lower. Vancity’s best five-year fixed mortgage is sitting at 3.79 per cent, and its variable rate is 2.2 per cent.

“After watching the news and realizing this may turn into lower mortgage rates, it’s re-lit the fire in people to come in and see what they can get,” he said.

And while no financial institutions have made a move yet, McKinley said the expectation is that rates will come down in the fallout from the cascade of economic developments that began with the European Union’s sovereign debt crisis and includes Standard & Poor’s downgrade of the United States’ debt rating and decline of world stock markets.

Douglas Porter, deputy chief economist for the Bank of Montreal, said the Bank of Canada is under less pressure to increase its key trendsetting lending rate, now at one per cent, after the U.S. Federal Reserve signalled Tuesday it will hold its corresponding trendsetting rate until at least mid-2013 due to the economic uncertainty.

That interest rate influences the variable mortgage rates banks can offer.

Porter also said the number of investors pulling their money out of stock markets and investing in bonds has pushed down returns from bonds, which will influence longer-term fixed mortgage rates, as well as lines of credit and other consumer loans.

“Lenders respond with a bit of a lag, they want to make sure this isn’t a flash and is a true change in conditions,” Porter said in an interview.

“But the longer this turmoil in equities lasts, the more likely it will work its way down mortgage rates as well.”

That will benefit first-time homebuyers and anyone looking to renew mortgages over the next year as lower rates reduce borrowing costs, said Scotiabank senior economist Adrienne Warren.

However, the effect of the low rates on the housing market will be tempered by how much potential buyers’ confidence has been damaged by the volatility in equity markets.

“It’s probably not a big shock for the housing market in general; I wouldn’t significantly alter our expectations over the next couple of years,” Warren said.

Those expectations were for modest increases in sales in Canadian housing markets, but relatively stagnant prices.

However, Warren said the economic uncertainty may squeeze existing homeowners looking to move up the property ladder, especially those worried about having lost money in their investment portfolios.

“In terms of the Vancouver market, that may be a fairly significant factor,” she said.

Phil Soper, CEO of realty firm Royal LePage, said Metro Vancouver is Canada’s most volatile market, which can move quickly up or down depending on the market’s mood.

“Because people push the limits of affordability when acquiring homes, they tend to be feverish in opportunities for new property when the sentiment is positive,” Soper said, “and they tend to move away from the market at a much quicker pace than other regions when feelings turn sour.”

Soper said economic uncertainty in the U.S., and whether it develops into a double-dip recession, is the biggest risk to housing markets. But he doesn’t see it denting Metro Vancouver’s market as deeply as the 2008 recession.

“By the fourth quarter of 2008, we were deep in the throes of an economic meltdown of a scale we hadn’t seen on a global basis for a generation,” Soper said. “Is that going to happen again so quickly? I think it’s very unlikely.”