Things To Consider in the Face of Rising Interest Rates

The Bank of Canada (BoC) has said it will be use its monetary policy to tamp down inflation, which currently sits at a 30-year high, joining the chorus of central banks worldwide trying to grapple with the rapidly escalating cost of living. So far this year, the BoC has already moved forward with rising interest rates three times, and Governor Tiff Macklem is preparing the financial market for more quantitative tightening in upcoming policy meetings.

But while the objective is to garner a stranglehold on a surging consumer price index (CPI) and producer price index (PPI), rate hikes will lead to financial pain for borrowers, investors and homebuyers.

Indeed, the Canadian real estate market is seeing the effects of a rising-rate environment. According to the Canadian Real Estate Association (CREA), in April, national home sales tumbled 12.6 per cent month-over-month. The national average home price was about $746,000, down a tepid 0.6 per cent month-over-month.

“After 12 years of ‘higher interest rates are just around the corner,’ here they are,” said Shaun Cathcart, CREA’s Senior Economist, in a statement.

Now that Canada is waving goodbye to the era of historically low interest rates, what do homebuyers and owners need to consider in a post-pandemic economy where rates are on the rise?

Things To Consider in the Face of Rising Interest Rates

Here’s what buyers and sellers need to consider in a rising interest rate environment:

Selling Soon?

If you are thinking about selling your home soon, work closely with your real estate agent to determine if higher borrowing rates may impact your listing price. Do you need to under-price the home to generate attention, or should you list it at its appraised value? Whatever your strategy, some markets have shown signs of moderation, so you may not see the same frenzy that became the norm during the last two years.

Are You Pre-Approved?

With interest rates on the rise, it is more important than ever to get pre-approved for a mortgage. This allows buyers to lock in at the current rate while you shop for a home and ensure that you enjoy some level of protection against near-future interest rate increases. Also, by having a pre-approved mortgage, you can take comfort in knowing how much money you have to work with during the home-buying process.

No More Frenzy?

Suffice it to say, now that rates are increasing the flurry of demand seems to be waning somewhat, with fewer buyers competing for the limited number of homes on the Canadian real estate market and fewer bidding wars. Instead, buyers may be able to calmly negotiate prices and come to reasonable terms and conditions with the seller, such as critical home inspections and property appraisals.

Stress Test Your Budget

Can you afford a higher mortgage payment in five years, when it’s time to renew your mortgage at a higher interest rate? Both buyers and sellers need to consider this in today’s rate normalization since greater borrowing costs could add financial pressures to your monthly household budget. Plan ahead and stress test your budget.

Waiting for a Crash or a Correction?

Now that Canada is moving on from the pandemic-era near-zero interest rate era, does this mean the housing market is in store for a crash? Not exactly, says Robert Hogue, the senior economist at RBC.

“We think the sizeable drop in activity in April marks a turning point for the Canadian market with further cooling on the way. The Bank of Canada’s setting out to aggressively normalize its monetary policy is a game-changer for the market—turning what has been a tremendous tailwind into a stiff headwind for the market,” he wrote in a research note.

“After a nearly two-year-long frenzy that propelled property values to the stratosphere in many parts of the country, a calmer outlook for the market should be welcome news. We expect the burgeoning price correction seen in Ontario and parts of British Columbia to deepen and spread to other markets as market sentiment sours, but it’s unlikely to morph into a meltdown.”

Suffice it to say, it is doubtful that a market like Toronto is going to eliminate all of its COVID gains.

Lots to Consider in 2022 – and Beyond

Indeed, there will be many things to think about in the Canadian real estate market moving forward, from mortgage rates to housing supply levels. While prices are elevated and are expected to remain that way until more inventory comes on stream, this might no longer be the red-hot housing sector we’ve become used to these last two years. Conditions seem to be stabilizing, the market is adapting to interest rates, and buyers and sellers may be rational again. Whatever happens, the next few years will be interesting!