Last month, I wrote an article about the Airdrie real estate market still being strong despite headlines stating that the market is crashing. There is still a lot of fear out there, and with the Bank of Canada raising the benchmark rate by a full percentage point last week, that fear in a lot of people's minds is justified.
Here are my thoughts. The increase in the rate means that people on variable rate mortgages will see one of two things happen. The first is an increase in their mortgage payments. The second is less money going to the principal amount owing and more going to pay the interest. The impact of this with the first scenario is that it will reduce people's spending power on goods, as they need to budget more for home payments. In the second scenario, it may take them longer to pay off their mortgage. At the very worst, it could put some people living at the very top of their means into foreclosure, as they cannot afford the additional amount needed for the payments.
The reason for the increase in the interest rate is to combat inflation. Inflation is a decrease in purchasing power; or put another way, the rising cost of goods. With inflation at an all-time high, we're seeing extremely aggressive measures to fight it (a 1% increase has not been done since 1998). It's a delicate balance to try and manage that. Typically, low interest rates are meant to stimulate buying. This is typically done in recession-type eras (as we've seen over the last five years). When interest rates start to rise, it means the economy is gaining strength. People are spending. Although borrowing rates are rising, the economy, in general, seems to be improving.
For people with fixed-rate mortgages, their payments won't change. However, when the time comes for renewal, they could be quite shocked at the higher payment amount. For people in this scenario, it's important that they start planning and budgeting for this in the future. Having an excellent mortgage broker is key. They can guide a person through their best options and prepare them for all outcomes.
What does this mean for the housing market? Well, people that are currently shopping for homes are getting qualified at higher interest rates. What this can mean is that their purchasing power is not as high. Someone that qualified for a $600,0000 home at 2%, may now at 6% only qualify for a $525,000 home. Some people like to jump to the conclusion that $600,000 homes will drop now to $525,000. But that doesn't make sense. The cost of goods is still high. You can't build a $600,000 home for less right now. So, what you may see happen instead is that the buyer for a $600,0000 home will now consider a semi-detached home for $475,000. Or a smaller home.
If you continue along this train of thought, you will likely see that apartment-style condos (a sector that has had the weakest growth in recent years in our region), will now start to really garner attention and likely demand will begin to outpace supply. Urban areas that were hit hard by COVID-19, will now start to gain popularity as gas prices soar. Many people will also start to look for rentals instead, which will create more demand for investment properties.
The consensus around interest rates was this last rate jump should cool inflation somewhat. It's not expected that interest rates will continue to rise steadily without end. In fact, it's predicted that rates will level off and potentially start to come down in the next year. So, although this can be a really difficult time for some families right now, it's not all doom and gloom. There are good things happening right now too. And guess what? With homes not seeing multiple offers as often, buyers can be a little more choosy and really hone in on what they want. For sellers, as always, it's important to have an excellent pricing strategy as well as a solid marketing plan when it's 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).
Enjoy this beautiful weather we're having and make the most of our short but sweet summer.