| Buying

Depending on the current market climate, your first thought might be, “Oof. Interest rates.” The thing with interest rates is that when it comes to home prices, they can be a godsend when they’re low, a curse when they’re high, and vice versa if you’re a real estate investor. To help you understand why, here we look at how interest rates affect home prices in Canada and why the idea of waiting out rates is a bit of a gamble.

It’s All About Supply and Demand

Interest rates are set by the Bank of Canada (BoC), which adjusts what is called the target overnight rate or policy rate eight times a year. They use economic health and inflation to determine whether they hold, increase, or decrease rates. So, when the economy is tanking, the BoC lowers interest rates to stimulate growth, and when growth is strong and pushing inflation upwards, they increase interest rates to discourage excess spending and help reduce inflation rates. It’s all about supply and demand.

A good example is what happened during the pandemic. First, the BoC drastically reduced interest rates to help compensate businesses and consumers unable to cover their expenses during lock down. As a result, there was too much spending which increased demand and pushed prices upwards. We then saw drastic increases in interest rates after the pandemic when inflation was out of control thanks to that upward pressure caused by high demand. In this case the BoC used high interest rates to dampen borrowing and spending, which in turn helped to reduce demand.

That brings us to housing prices. Reduced demand helps control rising costs, including prices in the housing market. As interest rates rise, it creates a double whammy effect forcing buyers to sit on the sidelines because they can’t afford the borrowing costs, pushing inventory higher and demand lower. This results in reduced prices because high inventory means buyers have more choices and more negotiating power. Of course, the opposite is true when interest rates are low. There are more buyers shopping which means inventory is absorbed more quickly, reducing supply, and pushing prices upwards.

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Interest Rates and Investment Properties

If you’re a landlord, increasing interest rates force more people to settle on renting their homes. This can have a positive impact on your income, as this increases demand, reduces rental inventories and pushes rent upwards. However, it can also be bad for landlords with variable mortgages. If your current tenant is covering your monthly expenses such as your mortgage, common element fees, taxes, etc. and suddenly higher interest rates increase those expenses, you’re left paying out of pocket. You might decide to cut your losses by selling, contributing to increased listings, higher inventory, and reduced prices. In this case, you might be in a tough spot because reduced prices eat into your equity.

The Dangers of Waiting for Rates to Drop

So, let’s try to figure this whole waiting out the rates idea.

The Mortgage

First, it all boils down to qualifying for a mortgage and affording your mortgage payments. There’s no point in hunting for a home if you know the current housing prices and interest rates add up to something you can’t afford. If you do qualify for a mortgage in the current market, you also want to consider how much you’re willing to pay in interest. Remember, the more you pay in interest, the more you’re paying towards housing expenses and the more you sacrifice elsewhere. This can mean no more vacations, no more nice dinners out, no more trendy cocktails on the patio or worse, no more anything because you’re house poor.

Although you might be willing to sacrifice some things to finally own a home, you don’t want to find yourself house poor. You’ll never have enough savings to cover things like emergency expenses for something like a broken-down car, or a new roof and unexpected changes to your income due to job loss or illness. Remember, higher interest rates mean lower housing prices and what goes up must come down. So, you’ll pay less now for a home and also see those interest rates drop eventually. So instead of waiting out interest rates, consider your finances and decide whether you can afford a home or not.

The Sweet Spot

Next, if you do qualify for a mortgage and high interest rates have caused a saturated market with high inventory and low or flat housing prices, you should consider buying a home now. Why? Because as interest rates start to drop, more buyers will race to the market and housing prices will start to rise as those buyers start to buy up the inventory. There’s a sweet spot where prices are low, inventory is high, negotiating power is on steroids and interest rates are dropping. A good strategy in this market is:

  • Pre-qualifying for a variable mortgage
  • Shopping while inventory is high to leverage your negotiating power
  • Benefitting from the possibility of a reduced rate when you put in your offer and
  • Locking in your interest rate when you see interest rates are about to stabilize
  • Look at it this way. You’re still waiting out interest rates but in this case as a homeowner who got in while the going was good!

Read more about getting pre-approved for a mortgage right here.

The Bottom Line

History tells us that low interest rates push prices higher and high interest rates either flatten or see slight month over month reductions in prices. It also tells us that upward price trends are far more likely than dropping prices other than in extreme economic circumstances. So, buying and investing in real estate is always about what you can afford, what you’re willing to pay, and whether you’ll qualify for a mortgage, because when it comes to housing prices, the market waits for no one.

Still finding all this stuff confusing? Call The Christine Cowern Team at 416.291.7372 or email us at hello@christinecowern.com with any questions or to set up a call. We’d love to work with you!