The Canadian Housing market continues to feel the heat from the rapid rise of interest rates. While rates over the last few years were at an all time low, it was only a matter of time before we ended up here. With that being said, we did not expect them to rise in such dramatic fashion.
See also: 5 Signs the Real Estate Market Has Shifted
The Why
Not knowing the full impact that Covid would have on the Canadian economy, the Bank of Canada decided to target record low rates with the intention to make funds available for people to spend back into the economy. This created a surge in housing prices as a greater quantity of people had the means to purchase a home; resulting in higher housing demand. Fast-forward 2 years and inflation is rampant (8%). As a method to correct and tame the high rate of inflation, the feds have doubled the overnight interest rate in six months. For context, we haven’t seen high overnight increases like this in over 20 years.
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The Impact
The bank’s rate increase has made its presence felt all across the housing sector. Whether you were looking to buy, sell or rent; the rise in rates has most likely changed your plans and/or budget. Higher interest rates make mortgage loans more expensive for buyers. This translates into a lower housing demand and causes a drop in the housing market as sellers are forced to drop their price in order to attract more buyers. As borrowing money becomes more expensive, we see less real estate transactions and people tend to turn towards the rental market. Of course this results in the scorching hot rental market we are starting to see.
Fixed or Variable?
One of the most popular questions right now is if people should get a variable or a fixed rate. Let me start off by saying that I am not a mortgage a broker and that you should consult with your lender as every situation is different. That being said, I do have a personal opinion when it comes to this topic. For some clarity, it is important to know that the Bank of Canada targets the overnight rate. This in turn affects the variable rate as it dictates what the prime rate will be. The fixed rate is connected to bond yields and move accordingly with the demand of government bonds.
A topic that no one is talking about is that the fixed rate has actually decreased over the past month and a half while variable rates have been on the rise. Although I tend to lean towards a variable rate (you pay a premium for fixed rates), every situation is different and depending on your specific goals both fixed and variables rates could serve you better.
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Final Thoughts
The Bank of Canada has eight scheduled dates each year where they make announcements for the overnight rate target. There is one coming up in September, another in October and lastly one in December. There is speculation that a rate increase will happen in September. My advice to buyers is to know their numbers. Determine your comfort zone when it comes to your mortgage. DO NOT try to predict the housing market as many have made that mistake in the past waiting for prices to drop even further. Take advantage of this opportunity and negotiate the right price for you for the home that you like.
Sellers, learn to adapt to the market and price your properties accordingly. If you do not have to sell, you can choose to wait until interest rates start to decrease or you can test the market at your price but have low expectations as you may have to take it off the market (There is also a downside to his method). Investors, there is potential here for investment properties as rental markets are hot.
Always work with a professional who knows their market.
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Feature image credit Dillon Kydd
