Not every realtor or real estate enthusiast will also be an economist, but there are going to be a few folks who can claim being both. It’s these individuals who will be more likely to know that the Bank of Canada has been aiming to keep inflation to at or around 2%, and they’ll also be the ones who might have strongest inklings as to why that may be unlikely to happen. One thing that even the less economically-savvy people will know is that a comparatively inordinate amount of Canada’s GDP is made up by real estate.

While we’re all either realtors or someone else who has some interest in the industry and profession, we can also fairly say that having so much of a country’s GDP in real estate may be less than ideal, and there are indeed some very knowledgeable economists who’d say it is even a little perverse. But it certainly is what it is, and in the same way and for the same reasons it is not hard to see the role that more cumbersome and expensive mortgages are contributing to the growth of inflation in Canada.

What will happen alongside this every time is that greater numbers of individuals, couples, or families that would be active in the real estate markets stay on the sidelines instead, and that equates to a dearth of new clientele looking to work with a realtor. Again, not much to be done in the big picture but what you can do is take advantage of our online real estate lead generation service here at Real Estate Leads. It will provide the leads on new clientele that you’re looking for, and making it easy for you.

Segueing back to topic, let’s look at the role of mortgages in Canada’s growing inflation problem.

Homebuyer Debt Fuel

We’re all going to be very much aware that The BoC hiked interest rates again a pair of weeks back in response to persistently high inflation, but what’s not so immediately apparent in the relevance of that is the way it is prompting questions about the role of mortgages in the ongoing battle with consumer prices for goods and services that are painfully high and climbing higher. The National CPI is Canada’s consumer price index (CPI), and it was 3.4% in May.

However some insiders have suggested that if mortgages are taken out of the inflation picture then the figure would quite a bit closer to the central bank’s 2% target. Those same individuals will also be saying that you can’t focus all or even the majority of blame for high inflation on mortgages, but at the same time the outsized role of real estate in Canada’s economy makes it fairly impossible for it not to pull on the needle with quite a bit of force.

One constant is that mortgages are especially sensitive to interest rates, and in this way this has the Bank of Canada’s rate-hiking cycle running at cross purposes when attempting to suppress inflation instead of pushing it higher. Interest on Canadian mortgage costs rose 29.9 per cent year-over-year in May – an increase nearly 10 times larger than the overall inflation rate.

More Off Target

Even the BoC governor has agreed that their CPI would be closer to target without mortgages, but he also said these days it may even be a case where too much of the focus is put on mortgages. There’s a lot of number crunching and perspective that goes into that, but it is a fair point to say that if mortgages were taken out of the equation then areas where prices are declining would also have to be taken out of the equation. Let’s take the equally punishing price of fuel. If we take out the ongoing inflation as it relates to gasoline prices it would leave a 4.4% overall inflation rate.

What this does suggest is that in many tangible ways real estate has grown into an industry that’s too big to fail. With that understood , it may be that high mortgage interest increases may be one of the central bank’s goals as it responds to a housing market rebound from earlier this year that came as something of a surprise given the climate.

The rate hike of Wednesday 2 weeks ago was a difficult, but probably necessary move to address inflation, but the need to push back against resilient housing demand and temper prices was absolutely a factor in it too. The ongoing reality is that inadequate supply is the primary cause of Canada’s sky-high housing costs. Occurring alongside of this are construction trends where high interest rates means the businesses that would be involved with home building struggle with tougher economic conditions themselves.

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Explaining the nuts and bolts of why federal interest rate hikes put a chill on real estate sales isn’t really necessary. Most prospective buyers will know when they’re at risk of overextending themselves with financing on a home that they may love just fine, but they know they can’t afford. With the latest 5-basis point rise in the BoC’s standard interest rate there are going to be even more dissuaded would-be buyers who choose to stay on the sideline.

But what isn’t so straightforward is how this contributes to the other end of what’s something of a double whammy. Insufficient inventory is always going to push prices up, as it always equates to even more demand than supply. And having demand infinitely higher than supply has been at the very core of overinflated home prices in Canada for well more than 20 years now. The part that’s not complicated is how fewer homes on the market means the ones there are selling for more than they probably should.

However, with the Canadian Real Estate Association’s announcement this past week that homes sales are likely to decline considerably over the course of the year because of those two factors – supply constraints and the higher cost of borrowing money – it’s a little more challenging to make the connection between the cost part of the equation. Logic might suggest that the number of qualified buyers who can absorb those higher costs would still exist in numbers needed to buy the homes that ARE for sale.

Definitely a topic worthy of digging into, and our online real estate lead generation system is ideal for realtors who are struggling to generate new clientele even at the best of time. But what’s to be made of the here and now, and what can we expect as summer and fall come to a close and we’re back into winter. Which is the season when the fewest number of homes are sold in Canada any year and no matter the economic climate.

Tighter & Tighter

As mentioned, this cut to the forecast for home sales is occurring as tightening home inventory and the Bank of Canada’s recent rate hikes have definitely pulled the housing market off balance. Alright, we’ve gone on long enough here without talking turkey. How much of a decrease is being foreseen, and what can a realtor in Canada expect because of that.

The CREA is currently foreseeing that sales for 2023 will be down 6.8% from 2022, and that’s quite a bit more pronounced drop from the 1.1% dip forecast in April. This past June 2023 was when sales really started to be pinched, with the number of transactions up just 1.5% from May. That increase was smaller than the ones for April and May, according to seasonally adjusted data released Friday.

The more influential of the two factors has definitely been the rate hike though. The BoC raised its benchmark rate for a second straight meeting in July and made it clear that if the financial environment remains the same then successive rate hikes may be coming in the future too. All of this means a major source of uncertainty has returned to the housing market.

Increasing Buyer Trepidation

And buyer trepidation based on home prices is most certainly a part of that too, as housing prices have climbed higher in recent months, although that aspect of it isn’t going to be a surprise to anyone. Housing prices did climb higher over the last few months, and yes the sheer lack of homes for sale is a factor in that the same way the benchmark price for a house in climbing 2% per cent in June from May’s $749,100 average is a major factor too.

The fact that total active listings jumped in most major Canadian cities last month would seem to counter the first part of this argument though. But let’s keep in mind that the number of listed homes has remained historically low for nearly half a decade now. There were just 3.1 months of inventory nationally at the end of June, down more than a full month from the most recent January ’23 peak at and an average that’s still far below the long-term average for the number of homes sold nationwide each month all through the year.

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As was expected, last Wednesday the BoC raised the bank’s interest rates again, and with much the same rationale as before – saying the 25-basis point rise is again necessary to counter inflation and based on unforeseen developments in the National economy. All of which would appear legitimate if you ask the same economists who will tell you this was inevitable based what was underway at the federal level with money-printing adventures at around 3 years ago this time.

Which of course is financed by the same taxpayers who then have to wear the weight of that indiscretion afterwards, and that’s not a very appealing prospect for all sorts of people for all sorts of reasons. Homeowners who are stretched too thin with higher and higher monthly mortgage payments, and if you’re one of those with a variable rate one then the news from last week may well be exactly what you didn’t want to hear if your finances are tight.

We don’t need to detail any further how higher interest rates takes the wind out of home sails sales, as it’s fairly straightforward when astute people make decisions about whether they can really afford to take on that mortgage right now. That’s going to equate to fewer homebuyers reaching out to realtors for help with their first-time home buying process, but our online real estate lead generation system is a way to counter that trend and see to it there’s not much of a dip in the number of new clients you’re drumming up.

Back to topic though, let’s use this week’s entry to get a clearer look at why the belief in the industry is that these rates hikes aren’t going to do much to factor into lower sales prices for homes, at least anytime this summer. And of course with Spring and Summer being the two seasons when homes in North America are most actively bought and sold.

Surprising Rebound

A recent RBC economics report shares the belief that these rate hikes from the Bank of Canada won’t promote much of a decline in home prices, if any. Yes, the 25 basis-point rise in the Bank of Canada’s policy rate should cool demand by a small amount over a limited period of time. The expectation is for conditions to ease some more over the foreseeable future and bringing markets closer to balance.

That evaluation is made based on the acknowledgment that the housing market has rebounded more rapidly than most economists foresaw it coming back. The BoC’s director had conveyed to Canadians in that the central bank was pausing its hiking campaign in January, and there are some industry insiders who believe that the strong market rebound that coincided with that in late January / early February was a fairly direct outgrowth of that.

That lines up with the increasingly broad rise in home sales over April and May created numbers that were a lot closer to pre-pandemic levels for that time of the year, and the belief is that a lot of that enthusiasm was built on the belief that interest rates were unlikely to be going up again.

And so while rates DID go up and again and real estate purchases are taking a noticeable hit because of it, the fact is that home resales are now just 6% below what was considered to be a ‘vibrant’ level in February of 2020.

Market Will Bear

Much of this can be attributed to the age-old maxim that prices are set by what the market will bear, and those who can afford those prices are the ones who set the market. Whether that’s right or wrong that’s the way it works and although the pool is shallower there are still people who can afford to buy houses and take on mortgages despite the current state of the market and interest rates playing their role.

And so here we are with prices remaining below year-ago levels, but the belief is that is a not-for-long reality for Western Canada, parts of the Atlantic Provinces, and Quebec. Prices gains are foreseen for these reasons coming up fairly soon, and those stronger prices could be increasingly convincing for sellers to list their homes and promote more summer sales activity.

That may occur to an extent, and while more inventory may bring down prices to a point the more likely scenario is that this now 5% range means that a housing market revival isn’t going to pick up much traction in this current fiscal environment.

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We’re just 2 days away from decision day at the Bank of Canada, and of course the big decision that’s to be made on Wednesday of this week is whether or not another hike of the country’s interest rate is in order. There are many insiders who have already stated it is very likely as good as done, and the reasoning being the same as the last increase to the federal interest rate – the inflation that is hurting the economy isn’t being suppressed to the extent we need it to be.

Much has been made of how interest rate hikes have put homeowners in precarious situations, and most specifically with those who have overleveraged themselves to buy a home. The FOMO – fear of missing out – phenomenon has been a very real one with home ownership impetuses for many young people in Canada, and it has been understandable. But unfortunately it is these people who are decidedly ‘house poor’ who stand to be most negatively affected if interest rates go up again.

In the bigger picture this will also always mean that fewer qualified homebuyers exist, and there also may even be qualified ones who are choosing to err on the side of caution when the cost of borrowing money is becoming much, much more expensive these days. That detracts from the ability of a realtor to generate themselves new home buyer clientele, and it is well known that the majority of homeowners will know personally of a realtor they’re likely to work with.

Our online real estate lead generations system here at Real Estate Leads can be a very good way for new realtors to still generate clientele of both types, and it comes highly recommended. But let’s dig deeper into what another raising of the interest rate could mean for new homeowners.

More Debt Servicing

Another increase will mean some homeowners will be unable to finance their mortgage. This is because incomes have not been rising in pace and so increasing amounts of these owners disposable income will have to go towards paying interest on our debt, while making much less progress on paying down the actual mortgage debt itself.

And of course those raises have happened eight times in less than a year, and another one on Wednesday would be the third increase for 2023. If it is the 25 basis points that economists are predicting then the overnight rate would be moving up to 5% and the prime rate to 7.2% .

This would make for the highest rates in approximately 30 years, and they’re going to take quite a bite out of the finances of lot less-stable homeowners in Canada. Those with a variable-rate mortgage will be taking it on the chin the worst, and estimates are that a homeowner who has put 10% down on a house that costs about $729,000 with a 5-year variable rate of 5.80 per cent over 25 years will pay $100 more per month in mortgage payments.

That may not seem like a lot, but for some households it will be problematic and let’s keep in mind these rate hikes seem to be coming fairly regularly now and what’s to suggest that’s not going to continue? Then there are those with a fixed-rate mortgage who will see an increase when their term expires. The ramification that will apply to all is that the rate hikes will have a little bit longer lag in terms of that monetary policy transmission to households.

New Lender Safeguard

But the consensus for current homeowners with a mortgage up for renewal within the next year is that they should seek out rates with a new lender. By doing so owners if rates are raised again they can try breaking their existing mortgage and switching to that new lender before your rate hold expires to lock in the lower rate.

As mentioned, the needs for these rate hikes are explained with the way excess demand in the economy looks to be more persistent than anticipated. Hiking interest rates is done with the aim to cool demand from the markets. This can be derived from both households and businesses, and the accompanying aim will be to balance it with production capacity.

This has the potential to be a worrying time for some homeowners yet again, but it’s an example of how the nature of lending means that people assume risks with borrowing money and that reigning in inflation is something that must be done even if it puts some lenders in increasing jeopardy.

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Sign up for Real Estate Leads here and receive a monthly quota of qualified, online-generated leads that are provided to give you the opportunity to be first-in-touch with prospective clients who are looking to sell or buy a home. And as you would hope they will looking to make that sale or purchase in the area of the country where you are working as a real estate agent. Realtors who are determined to increase their business levels will quickly see the value in having gotten onboard with this.

If there’s a subject that has more of a buzz to it in the world of technology than AI does, we’d like to hear of it. Everyone will know of the incredible disruption that’s underway because of Chat GPT and the like, and it’s already starting to reach into many different professional and industrial pathways and changing how people work and do business. It’s also helping people make better and more informed decisions with regard to where they put their money, and as we all know buying a home is one of the most pivotal decisions people make in their lives.

And so it is that Artificial Intelligence is being utilized by prospective homebuyers in Canada, and it is one application for it that like many others is likely set to become more commonplace in the future. There is already a story here in BC about a realtor who has built a platform to incorporate AI into his real estate services, and you can be sure that the big brokerages in Canada are making efforts to stay on the curve with this too. There’s a ‘shake up’ underway, and the only thing that remains to be seen is just how much shaking is going to be done.

One thing a realtor should always do in the interest of serving and retaining clients is to be as entirely in the know as possible when it comes to the industry. So it makes sense that an agent should be in the know about these disruptive technologies can be utilized to help clients who are looking to buy or sell a home. A knowledgeable realtor is a busy realtor, and every one of them will want to have fully satisfied clients that will return to them in the future if further sales / purchases are a possibility. Our online real estate lead generation system here at Real Estate Leads is an excellent choice for new realtors.

This weeks’ entry is going to look at AI in real estate, so let’s get to it.

Smarter Listings / Smarter Staging

Real estate companies are now using generative AI to create descriptions for listings to meet their clients’ needs and using it to stage images of an empty home. And AI is proving that it can definitely help those who are searching for their dream home. Two of the newer tools that have come out recently for doing just this are TopHouse and HomeSearchAI. They allow homebuyers to search listings with the exact specifications they might want, using normal language to sort the listings instead of using filters as they have with conventional resources to this point.

It is quite impressive with them how you can just type exactly what you want and it’ll understand what you need, and give you results based on your unique needs. You can have a product that understands a person’s unique need and removes a lot of the until-now inherent complexity in weighing potential homes against each other in the process of making a purchasing decisions.

It’s wonderfully simple – you just type in what you need, and it will give you results. Using AI allows the platforms to incorporate data previously inaccessible in a single platform for home searches. Examples could be the direction the home is facing, or simply typing in 2BR to have two-bedroom units evaluated exclusively.

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Less Restrictive Searches

Until now individuals were restricted by the maps-and-filter page user experience when searching for prospective homes themselves. Specifying the need for a four bedroom, detached with three-car garage or a 2-bedroom condo open concept facing north wasn’t realistic with the technology available to consumers until now, but with AI these types of direct spoken or text-entered search terms are answered with much more intuitive responses based on the ability of the artificial intelligence to better understand the requests.

In the future we will likely see these platforms adding more AI features like traffic data or school rankings so homebuyers can look for homes near quality schools, or within a reasonable commute from their workplace. There are all sorts of other possibilities too, and ideally we’ll see AI-driven real estate buyer / seller platforms featuring AI-enhanced home searching that is better tailored to those who are reasonably far down their search and know exactly the type of property they want.

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Sign up for Real Estate Leads here and receive a monthly quota of qualified, online-generated buyer and / or seller leads that will always be provided to you exclusively. You will be the only realtor to have your leads, and they will be for people who have indicated their willingness to buy or sell a home in the near future and do so in the area of the country where you are working as a real estate agent. These are YOUR leads, and what you have is that exclusive opportunity to be the first realtor to contact them and present yourself as the professional they need for best results with buying or selling a home.