Torontonians seem to have become hyper aware of interest rates as well as who Tiff Macklem is and when the next rate announcement is coming from the Bank of Canada (BOC). We’re waiting for the next rate hike decision with the same anticipation of finding out whether we were lucky enough to be given a chance at a chance to buy a Taylor Swift ticket. While interest rate decisions are certainly impactful, this type of behaviour is likely to lead to an overreaction one way or the other.
Take this past spring for instance. The BOC’s decision not to raise rates in March and April combined with low inventory led to intense competition amongst active Buyers, causing month/month prices to increase from January to May. More recent ¼ point rate increases in both June and July caused many would-be buyers to pull out of the market, slamming the breaks on the GTAs real estate market for the second summer in a row.
Interest rate increases means affordability is driving more decision making. Unlike in Covid where Buyers didn’t think twice about spending for more home, today’s rates have forced everyone to give things a second thought. This limits the number of first time Buyers and prompts up-sizers to reconsider whether they need and can afford more space. In todays market both Buyers and Sellers seem to look to rate decisions for clarity on which way the market may go.
Investors have also become rate sensitive. No longer wiling to bet on strong year/year price appreciation. Questioning why they would buy and maintain a property, often at a monthly loss, for a renter who feels disgruntled about how much rent they pay. All at a time when alternative risk free investments offers yields not seen for decades.
The reality is inflation and rate directions remain unknown. Most economists we rely to help understand where rates may go, previously forecasted we would be in recession already, with rates headed down not up this fall. Other unknowns yet to play out include recent revelations on banks willingness to hold prolonged amortization for surprisingly large numbers of mortgage holders.
As we head towards a new rate announcement on September 6th, Real Estate watchers should take note of factors not just interest rates.
The cumulative impact of rate increases has been more than significant and rightfully caused a rethink on asset pricing; however, there are opposing forces to increasing rates that impact the Real Estate market: increasing labour costs to build new homes, record population growth, and supply constraints that all levels of government continue to bicker about. All at a time when future supply may be restrained as builders and investors look to reduce exposure to the industry and slow the release of new projects.
It’s true another ¼ point interest rate increase is likely to maintain negative momentum and further impact affordability. Keeping perspective that a ¼ point rate increase means $15 more a month for every $100,000 of financing could prove beneficial.
Months of inventory is trending to a more favorable direction for Buyers. Those looking for a home should take note. At this time last year I wrote a post on how Buyers markets should probably attract more Buyers. Purchasing in more favorable market conditions despite higher monthly mortgage costs can positively impact your bottom line to the tune of hundreds of thousands of dollars. If 2023 is anything like 2022, you will benefit by recognizing the advantages of Buying when conditions are more favourable for Buyers, not when interest rates decision lead to more Buyers in the market.
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