Thursday, 5 September 2013

Expect 2013's "Demand-Depletion-post-Tightening Phenomenon" to be more pronounced than after previous CMHC rule changes

As I had expected back in June/July in my 2013 Mid-year summary:
3 JULY 2013
Greater Vancouver Sales are higher than last year, however the sales pick-up varied greatly with region. The record-low Fixed mtg rates this Spring was likely the main contributing factor – for the people who can still qualify for mortgages.

If Fixed rates continue to creep higher, we can expect to see people with mortgage pre-approvals jumping into the market before it expires (usually 60 day rate-hold). So we might continue to see a busier July than last year. However, if rates stay high, I expect to see a worse 2nd half than 2012-H2.

Demand was indeed pulled forward with the relentlessly rising bond yields over the last couple months.
However, it seems like the usual rate-holds are 90 days (CIBC, BMO) and 120 days (RBC,TD), with Scotia being 60 days.  It is also worth noting that some of the "special rate sales" offered by banks have a shorter rate-hold (60 days).

Back in June, RBC raised its 5Y Special Fixed Rate from 3.09% to 3.19% on June 10, then 3.39% on June 24.

With Fixed Rate on the upswing since early/mid June, the 90-day low-rate holds are starting to expire right about now.  The 120-day low-rate holds may still have a month left before they expire.

In any case, this seems like The Last Binge.

Globe & Mail had just published this story today:

Mortgage fears drive up Canadian home salesSep. 05 2013Fears of higher mortgage rates are driving strong sales in a housing market that was on the ropes just a year ago.
August sales numbers hint at a Canadian market that has “shades of taking flight again,” said Bank of Montreal economist Sal Guatieri. But observers suspect the upward trajectory will ultimately be flattened by rising rates, which have prompted many buyers to jump in sooner than they otherwise would have.

The rising rates have been forcing potential home-buyers who were sitting on the fence to make a major financial decision within 90-120 days. 3-4 months is enough time for any fence-sitter with a buying-bias to capitulate. This has occurred, resulting in an unseasonably "hot" July, August, and early September.

Contrast this year's 3-4 month "grace period" with previous RE-tightening events:
- 2012 July's CMHC mortgage rule change had 19 days of advance-warning.
- Previous 2 CMHC mortgage rule changes in 2010-11 had 2 months of advance-warning.
*Note that CMHC rule changes, upon implementation, overrides existing mortgage-preapprovals.

In 2013, where the 1% rate hike over 3 months was obviously also a "RE-tightening event", the fence-sitters have 3-4 months to capitulate, after they get pre-approved with lower rates in May/June.

Due to the longer duration of "grace period," I expect the "Drawn-Forward-Demand" phenomenon to be more pronounced than previous RE-tightening events.   I also expect the "Demand-Depletion-Following-Tightening" phenomenon to be more pronounced as well, taking place as early as mid/late September, exacerbating in Fall/Winter.

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