Will the Recent Increase in Interest Rate Affect the Housing Market?

Housing Market

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The recent spike in the interest rates enacted by the Bank of Canada has the housing market holding its breath. The bank’s benchmark interest rate has increased by an unprecedented amount in more than 20 years by a full percentage point to 2.5 percent. This is now the most significant one-time increase in interest rates since 1998. Witnessing this spike, other major banks such as Royal Bank and TD have been moving in the same direction with raised lending rates of 3.7 percent and 4.7 percent, respectively. 

This step speaks volumes in containing the high inflation where Tiff Macklem, Governor of the Bank of Canada, says, “Canadians are getting more worried that high inflation is here to stay. We cannot let that happen.” However, amidst it, the housing market takes the brunt of it. The previous year enjoyed record low rates, which drove demand and increased prices to a great extent. Yet, as this year progressed, the hiccups arose in order to contain the inflation. Average home prices have gone down by 18.5% or $150,000 these past few months. 

Both buyers and sellers experience a major impact due to the rising interest rates, especially the homeowners. With interest rates on the rise, homeowners are forced to deal with mortgages, enabling high borrowing costs and reduced borrowing capacity. This makes it difficult for homeowners to qualify for loans. Following this outcome, homeowners’ willingness to buy the properties has decreased. Meanwhile, it also leads to a slower rate of property development along with the plunging prices for finished houses. This may be a good chance for the sellers to sell their properties but not for the buyers. 

Property development can shift substantially with the increase in interest rates. This fans the possibility of developers slowing down on new projects, leading to fewer properties built. In light of such events, the rental market prices have leaped. With no new competition in sight, the rents of Canadian properties have seen an average of $1,885 monthly in June. In urban areas such as Vancouver, the rent of one-bedroom apartments is locked in at $2,418, which is a hike of almost 20% over the years. This indicates that high-interest rates can affect the rental market for the better. 

When speaking of major markets, the market of Ontario saw a significant drop of 6%  from the last month’s average, whereas Toronto saw a major slowdown in sales in July. However, amidst these plummeting prices, Edmonton remains affordable compared to other large markets witnessing the price growth as compared to other major Canadian cities such as Toronto, Vancouver, Hamilton and London. ACI Homes opens the doors for investors and homeowners to invest in real estate in the Edmonton market. Reach out to us to know more about the investment opportunities.