Another Attempt to Bring Balance…
In a move that has caught the attention of both economists and homeowners alike, the Bank of Canada recently announced a 0.25% increase in interest rates.
From the Bank of Canada:
“Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high. While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability.” You can read the full press release here.
This decision carries significant implications for various sectors of the economy, but one area that is likely to feel the impact the most is the real estate market. At the risk of sounding like a broken record, let’s do a little refresher on how rising interest rates can impact the real estate market specifically.
The BoC is constantly working to bring a nice balance to the economy; Ideally you want the economy to grow, reduce financial anxiety among the public and provide jobs/income to the population. But, too much growth too quickly can lead to rapid inflation.
A man once “chosen” to bring balance to a galaxy far far away
Interest rates play a vital role in shaping the dynamics of the real estate market. They have a direct impact on borrowing costs, mortgage rates, and housing affordability. When interest rates rise, it becomes more expensive for homebuyers to finance their purchases, potentially affecting demand, pricing, and market activity.
Mortgage Rates and Affordability
With an increase in interest rates, mortgage rates are likely to follow suit. This means that prospective homebuyers will face higher borrowing costs, leading to increased mortgage payments. As a result, some potential buyers may be priced out of the market or need to adjust their expectations regarding the type and size of property they can afford. This could dampen demand for real estate, particularly in regions where affordability is already a concern.
Existing Homeowners
Existing homeowners with adjustable-rate mortgages or those looking to renew their mortgages may also feel the impact of rising interest rates. As their mortgage rates adjust, they could face higher monthly payments. This might create financial strain for some homeowners, potentially leading to increased market supply if owners decide to sell their properties to alleviate the burden. Consequently, a surge in supply could contribute to a softening of property prices.
Housing Market Activity
Higher interest rates can influence the overall activity in the housing market. Buyers may become more cautious, taking additional time to assess their options, negotiate prices, or hold off on purchasing decisions. This could lead to a slowdown in transactions, resulting in longer listing periods for sellers and potentially reducing market liquidity.
Regional Variations
It's important to note that the impact of the interest rate hike may vary across different regions of the GTA. Areas with robust economic growth and high demand, such as major cities or regions experiencing population growth, may experience a more muted effect on real estate activity. Conversely, regions already facing affordability challenges or where housing markets are more vulnerable may see more pronounced changes.
Rising interest rates over the past year has increased the financial burden of many
As with any change in interest rates, the full consequences will take time to unfold. Real estate market participants, including buyers, sellers, and industry professionals, will need to closely monitor the situation and adapt their strategies accordingly. It remains to be seen how the market will adjust to these changes and how policymakers will respond to ensure a balanced and stable real estate environment for Canadians.
