By Nick Pope, Ourboro Co-Founder and Chief Investment Officer
Interest rate increases from the Bank of Canada have gained a lot of attention, stirring up conversations on the future of the real estate market.
With borrowing costs increasing for new buyers, more and more would-be purchasers have delayed moving into the market. Expectedly, this has led to a decrease in sales volumes while prices remain flat, compared to last year when both home sales and prices were rapidly increasing. Overall, sales volumes have decreased by 40% and we’ve even seen prices decline month over month in some regions.
Although periods of volatility can cause concern, it’s also important to keep a greater perspective of the market in mind.
Rising Interest Rates
The Bank of Canada (BoC) has been signalling this period of rising rates since the beginning of the year when inflation started increasing beyond its normal range. This inflation increase has been driven by the war in Ukraine and the continued supply-chain issues we’ve all been experiencing since the start of COVID-19.
The BoC has announced that it will be increasing rates monthly, returning them to a historically normal rate of 3%. The record low rates we’ve grown accustomed to over the last few years were used to keep the economy afloat during the COVID-19 pandemic, but also led to unsustainable jumps in asset prices. Returning to a normal band of interest rates will bring calm back to the market and decrease the chance of a major crash in real estate prices in the future.
Real Estate Prices
When it comes to real estate prices, it’s important to remember that it’s almost impossible to time the market. We’re currently in a period of price discovery where buyers are sitting on the sidelines, attempting to wait out sellers that may still have high price expectations. We can expect sales volumes to remain low until buyer and seller expectations come back together.
While prices are decreasing month over month, particularly in the suburban markets of the GTA, don’t forget that these same markets experienced 50% price increases just last year. Buyers who are ready now have an entry point that we’ve haven’t seen since the last sales volume slowdown in 2018. It’s anyone’s guess when sales volumes and prices will pick up again, but with rental prices increasing at historic levels it’s clear that the demand for housing in the GTA is still very strong.
For new buyers, falling prices should come as a relief. Competition for the same properties has slowed, so buyers no longer need to compete with as many other bidders, and can secure a property at a better price. Also, buyers can be more aggressive with conditions on sales to protect themselves if something comes up after an offer is signed. Although purchasing power is decreased with the higher carrying cost of increased interest rates, new buyers have the opportunity for greater equity appreciation over time by entering at a lower price.
Overall, real estate is an incredibly resilient asset. Unlike stocks, the benefit of real estate is that it’s not an asset you trade day to day. Not only is it a place to call home, it’s also a long-term savings plan. When properly budgeted, price movements (up or down) won’t affect your bottom line until it’s time to sell, many years from now. For the first time in years, new buyers could have a chance to get into the market at a good price without the competition of a dozen other bidders.
Like with any big purchase, it’s important to take a long view, and see the forest from the trees.