The Bank of Canada (BoC) has promised to use its monetary policy to suppress inflation, which is at a 30-year high, joining the chorus of other central banks around the world attempting to control rapidly rising living costs. The BoC already raised rates three times in 2018; Governor Tiff Macklem is readying the financial market for more increases in 2019.
While the goal is to achieve a stranglehold on a rising consumer price index (CPI) and producer price index (PPI), rate hikes will cause borrowers, investors, and homebuyers financial hardship.
The real estate market in Canada is certainly feeling the effects of a rising-rate environment. According to the Canadian Real Estate Association (CREA), national home sales fell 12.6 percent month over month in April. The country’s average property price was about $746,000 at the end of April, down 0.6 percent from the previous month.
“After 12 years of ‘higher interest rates are just around the corner,’ here they are,” according to Shaun Cathcart, CREA’s Senior Economist.
What should homebuyers and homeowners know now that Canada has bid farewell to the history of historically low-interest rates?
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’re considering selling your house soon, consult with a professional real estate agent to see if higher borrowing rates might affect the price of your home. Do you need to underprice your property to get attention, or should it be priced at its true value? Whatever your approach, some areas have exhibited signs of moderation, indicating that the same frenzy might not take place as in years past.
Purchasing Soon?
If you’re a first-time buyer or looking to upgrade, you may want to purchase sooner than later. The window to buy may be closing as interest rates will only get higher from here on out, eating into your purchasing power.
Are You Pre-Approved?
With interest rates on the rise, getting pre-approved for a mortgage is more important than ever. This allows buyers to lock in at the current rate while they look for a home, allowing you to be sure that you’ll have some protection against future interest rate hikes. You may also take comfort in knowing how much money you have to work with during your home search.
What If You Have an Adjustable-Rate Mortgage?
An ARM is a type of mortgage loan in which the interest rate is not fixed but instead adjusts periodically. This means that as rates rise, your monthly payments could increase as well. If you have an ARM and are worried about rising rates, consult with your lender to see if you can refinance into a fixed-rate mortgage.
What If You Have an Investment Property?
If you’re a real estate investor, now may be the time to unload some of your properties. Rents have been rising along with interest rates, so you may be able to take advantage of these trends by selling now and pocketing some extra cash.
What If You Have a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a loan in which the lender uses your home’s value as collateral. As interest rates rise, so too will the rate on your HELOC. This can be a major financial burden if you’re not prepared for it, so be sure to budget accordingly.
No More Frenzy?
Suffice it to say, rates are increasing, which appears to be lowering the number of buyers vying for a smaller number of properties on the Canadian real estate market, with fewer bidding battles. Instead of battling against each other, buyers may now negotiate prices and reach acceptable terms and conditions with the seller, such as thorough home inspections and property appraisals.
Stress Test Your Budget
What if you have to pay a greater mortgage payment in five years when your current mortgage comes up for renewal at a higher interest rate? Both buyers and sellers must consider this as today’s rate normalization increases borrowing costs. Prepare ahead of time by simulating your budget.
Waiting for a Crash or a Correction?
Is the housing market in Canada about to collapse now that interest rates have risen from near-zero levels? Not exactly, according to Robert Hogue, RBC’s senior economist.
“We believe the significant drop in activity in April signals a turning point for the Canadian market, which will get even colder,” he predicted 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, the Canadian real estate market will face many challenges in the future, beginning with mortgage rates and continuing through home availability. While prices are high and continue to rise, this may no longer be the red-hot housing sector we’ve grown accustomed to over the last two years.
The market is beginning to calm down, interest rates are being accepted, and buyers and sellers are once again behaving rationally. Whatever happens next will be fascinating!
In summary, rising interest rates present both challenges and opportunities for Canadian homebuyers and homeowners. If you’re considering selling, buying, or refinancing, be sure to speak with a qualified realtor to get the best advice for your situation.
