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Addressing Affordability Challenges – Longer Term Mortgages are not a Panacea

27 May 2024

Loan characteristics vary significantly across nations, with differences such as variable rate loans, foreign exchange loans, or interest-only loans. For example, in countries like Poland, variable rate products are predominant, whereas in Belgium and Denmark, most mortgages have fixed-rate periods exceeding ten years. A recent report by Desjardins suggests that we would not have seen the same financial stress in the mortgage market if borrowers had access to more 10-year loans. Borrowers with perfect foresight likely would have preferred longer-term mortgages; however, it’s also likely that we wouldn’t have seen as many borrowers opting for variable rate mortgages to meet stress test requirements during the pandemic.

While it’s true that if borrowers had locked in longer-term mortgages, they would have been insulated from higher rates at the renewal date, Desjardins’ analysis unfortunately overlooks the potential consequence: the Bank of Canada might have needed to raise rates even higher to achieve the same impact on the economy.

Furthermore, even if longer-term mortgages had been a more common choice of borrowers, it doesn’t necessarily mean that this would have alleviated the affordability challenges we are currently facing. In the US market, where 30-year mortgages are prevalent, borrowers still encounter affordability issues. Since the yield curve is upwardly sloping, borrowers will pay a higher rate for these longer-term loans than say a 5-year mortgage rate – but at the potential cost of a higher rate at renewal. A study by Redfin notes that the typical US household earns about $30,000 less than is needed to afford the median-priced home, despite the availability of 30-year mortgages.

While the affordability gap has eased since its peak in October 2023, when it stood at $40,810, US buyers now need to earn 12% more than they did a year ago to afford a typical home. (This calculation assumes that affordability is measured by monthly payments comprising no more than 30% of monthly earnings.)

Like Canadians, Americans have been on a path to an affordability crisis. In the US, there has been a significant underbuilding of housing since the financial crisis. With concerns over inflation and rising rates, higher mortgage rates have been squeezing buyers.

Home sales in the US have reached the lowest levels in nearly three decades. First-time homebuyers are finding themselves priced out of the market due to elevated rates, and prices are escalating due to a shortage of homes for sale. Existing homeowners, who have secured very low-rate mortgages, are hesitant to move, as they would face significantly higher mortgage rates.

Certainly, we need to improve mortgage options available to borrowers; however, as evidenced by the US market, we should not expect that to solve the affordability challenge we are currently facing.


Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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