Last month I wrote about the Airdrie property market still strong despite headlines that the market is collapsing. There is still a lot of fear, and with the Bank of Canada raising the benchmark rate by one percentage point last week, that fear in many people’s minds is justified.
Last month I wrote about the Airdrie property market still strong despite headlines that the market is collapsing. There is still a lot of fear, and with the Bank of Canada raising the benchmark rate by one percentage point last week, that fear in many people’s minds is justified.
Here are my thoughts. The rate increase means that people with adjustable rate mortgages will see one of two things happen. The first is an increase in their mortgage payments. The second is that less money goes to the principal amount owed and more goes to paying interest. The impact of this with the first scenario is that it will reduce people’s purchasing power of goods, as they have to budget more for home payments. In the second scenario, it may take them longer to pay off their mortgage. At worst, it could put some people living at the peak of their means in foreclosure because they can’t afford the extra amount needed for payments.
The reason for increasing the interest rate is to fight against inflation. Inflation is a decline in purchasing power; or, in other words, the rising cost of goods. With inflation at an all-time high, we are seeing extremely aggressive measures to combat it (a 1% increase has not been made since 1998). It’s a delicate balance to try to manage that. Generally, low interest rates are intended to stimulate purchases. This is usually done in recession-like times (as we have seen over the past five years). When interest rates start to rise, it means the economy is getting stronger. People spend. Although borrowing rates are rising, the economy, in general, seems to be improving.
For people with fixed rate mortgages, their payments will not change. However, at the time of renewal, they might be quite shocked by the higher payment amount. For people in this scenario, it is important that they start planning and budgeting for this in the future. Having an excellent mortgage broker is essential. They can guide a person through their best options and prepare them for any outcome.
What does this mean for the housing market? Well, people currently buying homes qualify for higher interest rates. This may mean that their purchasing power is not as high. Someone who qualified for a $600,000 home at 2% can now qualify for a $525,000 home at only 6%. Some people like to jump to the conclusion that $600,000 homes will now drop to $525,000. But that doesn’t make sense. The cost of goods is still high. You can’t build a $600,000 house for less right now. So what you might see happen instead is that the buyer of a $600,000 home will now be considering a semi-detached home for $475,000. Or a small house.
If you continue down this path, you’ll likely see that apartment-style condos (a sector that has seen the slowest growth in recent years in our area), will now start to really catch the eye and demand will likely start to exceed the offer. . Urban areas that have been hit hard by COVID-19 will now start to gain popularity as gasoline prices soar. Many people will also start looking for rentals instead, which will create greater demand for investment properties.
The consensus around interest rates was that this latest jump should cool inflation somewhat. Interest rates are not expected to continue to rise steadily without end. In fact, rates are expected to stabilize and perhaps begin to decline over the next year. So while this may be a very difficult time for some families right now, all is not bleak. There are also good things happening right now. And guess what? Since homes don’t often see multiple offers, buyers can be a bit more discerning and really focus on what they want. For sellers, as always, having a great pricing strategy and a solid marketing plan is important when it comes time to put your home on the market. Having a great real estate agent is the best way to protect your interests and get you moving (pun intended, my friends).
Take advantage of this beautiful weather we have and make the most of our short but mild summer.
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