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By Jordan Lavin, Ratehub.ca
Special to the Financial Independence Hub
Goodbye NAFTA, hello US-Mexico-Canada Agreement (USMCA).
The new trade deal with our neighbours to the south will have wide-reaching effects across all areas of our economy, and housing is no exception. While the agreement is said to be good for our economy overall, it’s not necessarily good news for your ability to afford a home.
What is the USMCA?
Canada recently reached an agreement with the United States and Mexico to replace NAFTA, the decades-old trade agreement that has stood since it was signed by Brian Mulroney, Bill Clinton and Carlos Salinas de Gortari.
The new agreement looks much like the old one, with some changes. Key differences include changes to the way the three countries approach auto manufacturing, fewer restrictions on trade of dairy products, and stronger measures against counterfeiting and media piracy. Like NAFTA, the USMCA makes it possible for the three countries to exchange goods without barriers.
For now, the US, Mexico and Canada will continue trading under the rules of NAFTA. The USMCA will come into effect once it’s ratified by its members, a process that could take months. In the United States, congress won’t vote on ratification until some time next year due to that county’s mid-term elections. Here in Canada, the looming Federal election means that if the USMCA isn’t made official by June, it could be delayed until 2020.
How does this affect Canadian housing?
If you’re wondering how having access to American milk at your local Superstore can possibly affect how much mortgage you can afford, you’re not alone. The implications for home affordability are driven by the market’s reaction to the uncertainty of the negotiation period, the removal of uncertainty brought by a signed agreement, and the actual economic growth that’s expected to occur because of the USMCA once it’s in force.
When the Trump administration demanded to renegotiate “the worst trade deal” ever, the market got spooked. As the trade war intensified, the US threatened to (and did) impose significant tariffs on imports from Canada. With repeated threats from our largest trading partner, there was a real chance that the Canadian economy could be jeopardized. Even though our economy was growing during that time, the Bank of Canada (BoC) was reluctant to raise interest rates, which it would normally do in that situation.
Now that an agreement has finally been reached, all the things that were in a holding pattern have started to move again. The removal of uncertainty means the BoC will be much more comfortable raising interest rates. The BoC took its first opportunity post-USMCA to do just that on October 24th, and it has one more chance to raise rates again this year on December 5th.
As trade normalizes, the USMCA is expected to bring added economic prosperity across North America. That means there will likely be more interest rate hikes and a rise in bond yields, the primary influencer of fixed mortgage rates.
When it comes to affording a home, higher interest rates are not a good thing. A mortgage affordability calculator looks at your income versus your costs. The higher the interest rate, the higher the mortgage payment.
Outlook for first-time homebuyers
If you’re hoping to buy your first home soon, there are two events that are looking more and more probable that will have a hand in determining your fate.
The first is that mortgage rates will rise, possibly rapidly, over the next few years. The best mortgage rates in Canada are up from where they were a few years ago, but they’re still at historic lows. This will reduce the overall amount of money you’ll be able to borrow to buy a home.
The second is that rising rates will hurt mortgage affordability for everyone across the country, driving home prices down. Over the last 10 years, people have been able to afford much higher home prices because low interest rates allowed them to borrow a lot more money. Higher rates will reduce everyone’s borrowing power, and sellers will find far fewer buyers able to pay the prices being commanded today.
For first-time homebuyers, this means you’ll likely be able to afford a similar home now or in the future, only a larger portion will go to the bank instead of the purchase price of the home. Unfortunately, there will also likely be a significant delay between mortgage rates going up and home prices coming down. That means the next few years could be rocky for first-time homebuyers.
The only difference is timing
The USMCA is paving the way for a rapid increase in mortgage rates over the coming months, but higher rates were looking like an inevitability to begin with. Without a looming trade war, the forthcoming rate increases would probably already have happened. The negotiations caused a year or so of wait-and-see; the waiting is now over.
Market forces change quickly, however, and the path to higher rates won’t be a straight line. There will be ups and downs, and unexpected things will happen. When it comes to mortgage rates and house prices we can make predictions all we want, but there are no guarantees.
Jordan Lavin grew up on the coast of British Columbia, and moved to Toronto in 2004 to study radio and television at Ryerson University. After school, his part-time job at a local radio station quickly turned into a full-time marketing position at one of Canada’s leading sports broadcasters. Jordan developed a passion for personal finance while buying his first house, and his obsession with online mortgage calculators led him to Ratehub.ca. When he’s not at work, you’ll find him at a campground, at a curling rink, or relaxing at home with his family.
