Vine Group Executive Market Commentary
On March 10, 2023, Silicon Valley Bank (SVB) was shut down, sending markets into a frenzy with the news.
SVB has been a world leader in providing tech start-ups with financing since its founding in 1983. End of 2022, they had US$209 billion in assets, making them the 16th largest bank in the US.
What happened to SVB?
In 2021 SVB decided to redirect billions of dollars from their lending operations into US government bonds and mortgage-backed securities (MBS). When the US Federal Reserve began to increase interest rates, the value of their investments dropped and limited their ability to service their customers’ withdrawal needs. Deposit holders had already begun withdrawing funds as tech firms and venture funding began to dry up. SVB disclosed a paper loss on March 9 and the intention to sell several billion in shares to help with their liquidity needs. This spooked the market and resulted in a stock price decline of 60% and set a run on the bank by deposit holders.
US regulators ultimately stepped in to shut down the bank Friday, March 10th and froze US $175 billion in deposits.
Bond markets reacted dramatically to the news, with short-term bond yields (1-3 years) seeing nearly a 70-basis point drop (0.70%) after the news was released.
Government of Canada Marketable Bonds – Average Yield 1-3 year
Rate decreases in 2023?
This shift has completely changed market expectations of future moves by central banks regarding their monetary policies. Last week Bank of Canada (BOC) announced no change to their policy rate and advised they would hold rates steady at the current 4.50% for most of 2023 until inflation/employment data started to improve. With the failure of SVB, the market has reassessed central bank expectations and now sees BOC potentially decreasing rates as early as their next meeting on April 12th by 0.25%. Additionally, the market is pricing at least 50 basis points of interest rate cuts by summer 2023.
Is this the best time to be buying real estate?
Regardless of what happens with rates in the next few months, it’s reasonable to assume that we’re likely seeing the peak for mortgage rates. This is an excellent opportunity for investors and new home buyers to take advantage of much lower real estate prices despite the current higher mortgage rates.
Nationally home values are down almost 30% compared to last year. Also worth noting is that despite much higher rates with lower purchase values, the monthly payments are not too different in many cases.
With the average Canadian sold price shown above, a buyer today would save almost $185,000 on the down payment despite having a higher monthly payment of $130.
With a short-term rate strategy, this buyer can lock in a 1-2 year fixed rate to ride out the current rate cycle and then be in a position to renew/refinance at future lower rates.
Would caution anyone who is currently timing an entry into the market. When rates ultimately come down, we could see real estate values return to growth which would mean a higher down payment requirement and more competition, especially as Canada expects to see a boom in immigration and more demand for housing over the next few years.
What we have been suggesting to clients
- Consider a short-term fixed-rate between 1-2 year terms. These are very digestible periods where planning becomes much easier (you’re less likely to sell quickly or suddenly have to break your mortgage or make significant changes). These short terms will also coincide with where most economists see rates coming back down so you can be in the best position to renegotiate your terms moving forward.
- Consider a 5-year variable/adjustable rate. If you want to get the lowest possible rate these days BUT are ok with rate fluctuations, this is still the most attractive option historically over the long term. On average, over a 5-year term, a variable rate will likely do much better than locking into a 5-year fixed rate which on average is sitting in the mid 5% range these days. Note that variable terms that are “insured” or have less than 20% down are some of the lowest in the country. With possible market expectations of a rate drop by the summer, variable rate holders could finally see a little relief in their monthly payments.
- Convert to fixed. If you have a variable/adjustable rate with a short time to maturity (let’s say, 1-2 years), consider asking about converting to a short-term fixed rate to hedge against future increases. Many lenders allow this option without a penalty or a new application to be completed.
- Consider a HELOC. HELOCs are often used to fund renovations, investments and for emergencies, but they can also be used to carry your traditional mortgage balance. Instead of borrowing with a mortgage on a fixed or variable term, a HELOC allows you to have a fully open, interest-only option. This means that although your payments are adjustable (linked to Prime), you will only have to make minimum monthly interest payments which could allow you to increase cash flow significantly. Eg – On a $500,000 HELOC, compared to a mortgage, you are paying $375/month less. All of this is going towards interest and not principal, but it allows you to improve cash flow in times of uncertainty and then convert to a regular mortgage when rates are more attractive.
The next Bank of Canada announcement is scheduled for April 12, 2023.
A financial review is key to ensuring you can navigate the current climate. If we haven’t already, let’s chat and see how we can help.
We’re all in this together and will come out stronger together.
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