Interest Rate Risk

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What if Rates Rise?

Anyone who owned real estate in the 1970's and 80's knows that today's real estate prices are highly speculative and only manageable because of historically low mortgage rates and provable incomes.

As long as rates remain in the 3-5% range, and household incomes do not fall further behind in real terms, then one might believe that housing prices could remain aloft for some time to come. 

In the Canadian metros with hot housing markets, that's the story. In small town Canada without a major corporate or government employer, the income side of the qualification fails and housing is a depreciating asset.

Inflationists are betting that housing prices will continue to rise because of government subsidy and global money printing. 

Deflationists don't see inflationary effects from the printing other than serial speculative spikes and sell-offs (commodities, stocks, bonds, real estate) that further distorts wealth distribution. Where is the productivity, pricing power and wage growth?

Most people agree that if inflation (both price and wage) does get beyond the policy target of 2% CPI, then rates will rise across the curve. The private sector lenders will need higher rates to manage risk, and the government sector will need higher rates (or higher taxes and less subsidy or spending) to dampen inflation.

Notice that a mortgage rate move from 4% to 8% results in a 45% increase in monthly payments over 25 years. 

Before you sign up for that big mortgage, make sure your household income does not have a shorter amortization than the loan.

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