It is a well known fact that only reason interest rates as determined by the Bank of Canada have remained as low as they have throughout the COVID-19 pandemic was to buoy the economy and promote economic resilience in the country during this troubling time. Economists had warned that eventually rates would have to rise, and that would be the case even if it was going to be bigger-picture beneficial that they stay low. It is also very well understood by those working in real estate that low interest rates have added to the overinflated housing market and affordability woes for people.
The premise for how that works is simple – when it is inexpensive to borrow money, more people will do that to buy homes as investments, and the people who have the means of doing that are usually ones that already own a home that is their primary residence. Whether that home is owned outright may be another story, but the point stands. Low interest rates help everybody get into the market more readily, so home prices aren’t going to be any lower at all for anyone that does move forward with purchasing a home.
The challenge is created for first-time homebuyers, and in a roundabout way a different challenge is created for people working as realtors who haven’t built up their business yet. Fewer folks able to pay what the homes will cost means a depleted clientele base for some realtors, but here at Real Estate Leads our online real estate lead generation system can help check that disadvantage during difficult times.
It gives realtors who are new to the business a way to be fast-tracked to being in touch with legitimate potential clients who will be needing to work with a realtor in the near future.
Moving back to topic, however, it has been stated with certainty now that the BOC is going to be rising federal interest rates and not surprisingly there is already a bit of a rush for new homebuyers to get into the market before those new and higher rates become a reality.
Up to 6x Rates Hike
To get right to it, the expectation is that the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022, and it is not unrealistic for realtors working with certain types of clients at this time to be advising those individuals or couples that they might want to speed things up and get in now if possible. homebuyers should start preparing sooner rather than later.
However, you can also tell them there is risk with getting into the market at today’s rates. These are not normal interest rates and eventually they will rise. Clients should be prompted to ask themselves if they can afford this mortgage if rates go up 10, 150, or even 200 basis. That could be catastrophic for buyer’s when it comes time to renew the mortgage on the home they’ve bought and they were stretched way too thin in the first place but could get away with it because of low rates at that time.
The governor of the BOC has said that rates could start rising as easy as April, and that goes against what had been said long before when it was stated that rates could hold steady at their current numbers into 2023.
Biggest Implications for New Homebuyers
For clients it is time to start thinking about the potential of higher interest rates and what that might mean. As stated earlier, we are all aware how ultra-low interest rates bolstered the Canadian real estate market throughout the COVID-19 pandemic and have helped propel home sales and prices to new heights.
That in itself hasn’t been a bad thing at all, whether you’re a working person, a homeowner, and as is the case for most people – both. But here we are with a reality that the bank rate is at 25 basis points. If the market is right it might go to 1.5 or maybe to 2% and obviously that is a significant increase over time.
Higher rates on the horizon will likely bigger implications for new buyers than for those carrying an existing mortgage that they’ve already paid down to some extent over time. The average mortgage now, is about $450K for a home in Canada. A 100 basis points rise would work out to an extra $250 per month and there are likely many households and working couples that wouldn’t be able to accommodate that.
Alternately, some of them may be better suited to taking the financial wallop on the front side and doing what’s necessary to meet down payment needs now so they can get into a fixed mortgage now and be at least somewhat better off down the road. Most realtors will have a mortgage broker they work with as a preferred partner, and yours should be able to help clients make that decision in the smartest way possible.
Increased Affordability? No Guarantee
Higher interest rates could cool off the housing market, but even if they do that won’t necessarily translate into improved affordability. That’s because higher inflation is currently offsetting any meaningful wage gains brought on by the labour shortage. The speed at which interest rates will be rising is going to be the key. A 6x hike is very aggressive, and so we all have to think about higher interest rates down the road when it comes to best assisting and advising people who are considering the purchase of a home.
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