As we all are experiencing the market shifts, I’d like to highlight some key considerations as the economic climate starts to resemble more and more the cold winter that seems to be looming around the corner. Here are the 3 top contributors to slowing market conditions and how to strengthen your position in preparation for what I think is going to be a long frigid season…
Stricter Lending Guidelines
Apart from that wonderful extra 2% qualifying rate that was imposed on us earlier this year, I’ve noticed working daily with mortgage professionals that the information/paperwork needed to qualify an application for credit is considerably harder to satisfy for the lending companies. This results in delayed deals, sometimes conditions not being met on time and properties put back on the market. Rising interest rates are also putting a damper on affordability for buyers and creating increased days on market for properties. A good way to avoid this problem is to get prequalified by your lending institution well before you decide to put in an offer. This will give you a definite advantage when it comes putting in clauses you need for financing, the less time needed the more appealing to the seller.
Flattening Bond Yield Curves
Alien terminology… I know! Unless you are an economist or very well versed in investing you probably don’t know what this means. I will attempt to translate into a more palatable understanding of why this is bad! Bond yields traditionally are a good predictor what future economic conditions will follow. Without getting into a thousand word explanation, I will propose a scenario to illustrate. Suppose I am the government and say I will borrow money from you for a year and pay 2% or I will borrow for 5 years locked in and still pay 2% per year, which would you rather choose? I would hope you chose the one year option as you have the choice to renew without being committed to five without that choice. Now this seems like not a big deal but if that one year term interest rate becomes 3% while the 5 year term remains at 2% that becomes what’s called an inverted yield curve. Let’s put it this way if that happens it’s usually a precursor for hard times ahead.
Rising Interest Rates
As I mentioned earlier, interest rates are on the rise… A sign that the Bank of Canada wants to slow debt accumulation. The average Canadian consumer debt including mortgage is 163% of disposable income* and rising. As rates rise the amount to service those debts rise accordingly and eventually become impossible to service leading credit compromise. This situation of bad credit can become a vicious pit to fall into and very difficult to climb out of. A good caution is to slim down consumable debts and consolidate high interest paying loans into lower options. Also these times are probably not the best to take out equity on your home for that Royal Caribbean cruise!
In summary predicting the climate, whether in the economy or in a literal sense there is no certainty but seasons and cycles are real! Just as specific current indicators can indicate probable outcomes I would with relative confidence predict that in January or February it would probably be a bad idea to go outside in your shorts and a T-shirt!