Interest Rates Are Going Up. Is It Time To Panic?
Interest rates are going up, inflation is up, is it time to panic? Let’s look at it from 3 perspectives: buyers, sellers and real estate investors.
Before I get into the 3 different perspectives, let’s talk about what has happened in the past 2 years. Who would have thought a pandemic would result in sky rocketing real estate prices and high inflation. Governments printed a Lot of money to prop up the economy and central banks took on bond buying and ultra low rates to prevent the bottom falling out. Unfortunately signs of persistent high inflation were ignored in the fall of 2021. I believe the federal government and Bank of Canada should have started addressing inflation back then and not wait 6 months till now to slam the breaks. Yes, I’m being critical of their slow reaction but I digress….
Sellers
Let’s look the home sellers perspective. Well I have bad news, the days of 20-30 offers are pretty much gone. There will be multiple offers depending on the type of property but less. Also, expecting buyers to throw money like it was 2021 is a thing of the past. There will be friction moving forward as sellers expectation adjust to market reality. As a seller, pricing your home according to market conditions and having realistic expectations is important.
Buyers
As for homebuyers, good and bad news. The bad news, the cost of borrowing has increased but it’s not that bad. For example, let’s say you have a mortgage a $500,000 mortgage which will cost you a 1% more than it did last year. 1% of $500,000 is an additional $5000 of interest annually. On the flip side, less buyers demand means less competition. Less competition means less chance of getting into situations where buyers have to pay additional tens of thousands of dollars.
Real Estate Investors
Good news for real estate investors: less competition if they are looking to acquire properties and more rental demand as some buyers will be pushed out of the buyers market.
Should You Panic?
You shouldn’t. Definition of a balanced market is 3-5 months supply. In order for that to happen, the number of homes for sale would have to significantly rise. This would happen if there are massive layoffs and/or immigration comes to complete stop. We have 400,000 immigrants coming to Canada per the Federal government and approximately a third end up in the GTA. They need a home. As for building new homes, It takes up to a year, yes up to a year to get permits to build one single family home in the city, supply will never catch up unless there is a radical change to the way government reviews and approves home building.
Am I optimistic? Yes. The last 2 years haven’t been good, 20, 30% appreciation is not sustainable and bubbly. 6-8% appreciation is healthy and sustainable due to jobs, immigration and supply shortages.
Are you on the fence and not sure how to move forward? Feel free to connect.
Till next time….