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Are there options to offset higher mortgage payments?

Discussions on the housing market focus primarily on prices and stakeholders including sellers, buyers and real estate agents. By this measure, the Canadian housing market may be in a golden period. The latest data suggests that over 58,000 houses found new owners in February, new listings are on the rise and the rise in prices is continuing unabated, with the average price now sitting at a whopping $816,720.

There are buyers, so many that bids may be as high as tens of thousands of dollars above the usual price; there are sellers, with new listings surging of late; and the price levels seem to indicate that people have money in their hands to buy a house either as an abode or as yet-another investment asset.

But talks about a housing bubble have also had headlines. A correction, or even worse, a large-scale crash, may have been looming for a while, some analysts suggest.

These discussions may not be giving a complete picture for there is one more stakeholder that usually does not feature in discussions on the housing market – a buyer who has recently purchased a house and exited the market.

This stakeholder may have a key role in shaping the market in the near-to-medium term. How? This buyer bought the house to occupy it, or as a flipper to sell it at an appreciated price.

In both cases, what happens once the sale has been executed may go a long way toward shaping sentiments. Now that the Bank of Canada has addressed the threat of record-high inflation and is raising interest rates to control it, things are probably set to change for homebuyers.

Reports suggest people are flocking to mortgage agents to seek advice on how rate hikes would impact their home loan repayments. According to estimates, mortgage loans have a substantial share in the total household debt in Canada, close to some 69 per cent. This share, experts say, has increased in the post-pandemic phase. What may worry the most is the high debt-to-disposable income ratio, which suggests that Canadian households have an average of $1.77 debt against a dollar of disposable income.

While the rate hikes could initially impact borrowers with variable interest rates more than those who have a fixed-rate loan, things may become complex in the coming days.

Separately, in the event of a buyer having bought a house as an investment asset, the impact of a rate hike could be two-fold. On the one hand, mortgage loans becoming costlier may ultimately lead to a correction in the market, which may prevent house prices from appreciating in the same fashion as they have over the past 18 months.

Windfall capital gains, by this measure, may not accrue. On the other hand, if that buyer has also availed a loan to fund the asset, mortgage dues are likely set to become costlier.

Regardless of how the housing market shapes up in the near term, concerns over higher mortgage payments are here to stay.

In this light, what is the road ahead for an indebted household? Income may not be raised overnight to offset steeper debt repayments.

Some experts are concerned many households may end up living paycheque to paycheque, struggling with finances. It means Canadians must become a little more cautious when selecting an investment asset.

Fixed income options like term deposits are usually safe, but they may not provide an adequate hedge against rising inflation. What then? First, let’s look at the option that is riskiest, though gaining popularity.

Crypto assets including Bitcoin and Dogecoin have gained traction over the past few years, thanks, perhaps, to a steady rise in the number of entities providing crypto trading services. But cryptos have always had an unpredictable ride, with only those investors that buy and sell the asset at the most opportune time likely able to make gains. This year so far, these assets have largely remained subdued, with large cap cryptos like Ether and Shiba Inu trading in the red on a year-to-date basis.

The global stock market has not performed great this year, but this option is less risky. On a YTD basis, the S&P/TSX Composite Index, the benchmark index of the Toronto Stock Exchange (TSX), is trading in the green.

Last year, this index topped 20,000 points, a milestone that may have been deemed too formidable at a time when the economy was reeling from the pandemic-induced slowdown. Global stocks like Apple and Microsoft, which gave returns in 2021, are also an option available to investors based in Canada.

As stated earlier, stocks trading on any exchange are a risky asset, but they may provide an opportunity to those homebuyers in Canada who may see an uptick in their debt due to rising benchmark rates.

Away from all the talk about sky-high home prices and a looming correction or crash are those buyers that have purchased a house in the hot market. Now is when some of these buyers might experience the troubles that come when debt becomes burdensome.

Data suggests total household debt in the country is as high as $2.5 trillion, and new mortgage debt of over $190 billion has been added during the post-pandemic phase. Separately, analysts are concerned that high household debt might elevate macro-economic troubles, which may be the primary reason the bank wants to dissuade borrowing by raising rates.

That said, the housing market does not seem to be in any major trouble as of now. New listings are here for prospective buyers to bid on.

The market may defy the odds of higher mortgage rates if Canada manages higher economic growth, combined with job growth and wage rise. As far as investing in the wake of high inflation and likely rising mortgage payments is concerned, Canadians must be more careful than before. Knowing what benefits and risks any investment option brings is key to a prudent investment strategy.

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