How Low Will Canadian Real Estate Go with Increasing Interest Rates?

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The constant rising of interest rates by the Bank of Canada has already caused the Canadian Real Estate market to slow down. The central bank has been increasing the interest rates repeatedly over the past few months in an effort to curb soaring levels of inflation, and following that move, property sales and prices have been steadily declining.

Recently, the Bank of Canada announced an interest rate increase by a full percentage point which was higher than the market’s estimate of 75 basis points. Post the increase, the benchmark interest rate is 2.5% from 1.5%. This has been the fourth consecutive interest rate increase since March this year, and it is also the first time since 1998 the bank has raised its rate by a full point.

As a result, Canadian investors and homebuyers are now wondering how low valuations could get as interest rates increase and the post-pandemic market begins to take shape in light of the slowing down of home sales and dropping prices of homes in cities across the country.

The Current Situation

The Canadian real estate market has had a fantastic two years. The market had actually experienced the greatest price growth during the period of low-interest rates and urban emigration. In fact, the situation was so favorable that investors even began to make up one-fifth of all homebuyers in the nation.

Today’s rising interest rates, however, are not favorable for Canadians, particularly for those who have taken out huge loans recently to purchase one or more homes in the country’s scorching real estate markets. As many people feel this is the most catastrophic home market downturn the nation has seen in recent times, investors are actually continually looking out for methods to sell those properties. Further, the worth of those properties also no longer makes much sense due to the central bank rate’s six-fold increase, as even rents can no longer be used to pay the mortgage interest.

Almost every quarter more bad news is coming in for the market with more renewals and more negative cash flows. This further implies holding onto rentals is not profitable either. Moreover, in major Canadian housing markets like Toronto and Vancouver, lower sales activities and even drops in the price levels had already begun in the months of April and May.

As a result, the market is bracing itself for even higher increases in the near future and believes that selling the houses now makes more sense based on this current trend.

Why are the interest rates being raised?

The favorable market environment, particularly in the last two years, had led to an excess of demand situation inside the economy, which sparked a period of high inflation. The inflation rate hit 7.7% in May and was the highest since 1983. The rising price levels especially with respect to necessities like food, energy, and shelter impact the standard of living of the people living within the country.

As a result, the central bank had to steadily raise interest rates in order to contain the inflation rate. While rising interest levels won’t reduce the global inflationary pressure, it will help in cooling down the demand situation within the country to some extent.

According to the central bank, interest rates might be raised further, if necessary, in the near term to reduce inflation and cool down the excess demand situation. In addition, Sherlock Yam, a Vancouver-based mortgage broker, has predicted that interest rates could rise once more in the near future, followed by another increase.

How is the interest raise harming the country’s real estate market?

The consistent interest rate increases have scared many investors, especially the ones who have recently purchased a home on a variable rate mortgage. Compared to 2021 levels, mortgage debt has not only increased but its pace of growth has also gone faster and that is why Canadians are under high levels of indebtedness. This higher interest rate will be making the borrowing cost much higher for households and businesses and Canadians with variable rate mortgages will be the first to feel the pinch of interest raises.

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The effects of the rising borrowing costs have already started impacting the housing market of the country. A situation of somewhat forced selling and distress in the market has been created these days. For instance, the Toronto region, which is considered the largest real estate market in the country has seen a huge 41% drop in the number of home resales last month compared to last year’s levels. Also, the home price within that region has dropped 10% from the March peak to June. Moreover, real estate investors are losing their prospective margins with the rise in borrowing costs.

Now, whether this reduced demand is just another dip or something more serious can only be determined depending on the fact that how many people actually start finding themselves in trouble or whether the trouble leads to a new momentum in the market.

How low the market will go?

Although it is tough to forecast how low the real estate market will fall, it is clear that demand will decline significantly and that the economics for investors will also significantly worsen. Additionally, the buyers’ enthusiasm for buying properties has decreased due to rumors about a further rise in the interest rates. Yes, the market might lighten up a little bit if there is a subsequent fall in interest, but as of right now, not much growth can be expected as to what will occur in the near term.

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