ARE RISING RATES COOLING THE MARKET?

April 19, 2022

Following much anticipation, the Bank of Canada doubled its benchmark interest rate from 0.5% to 1% last Wednesday, marking the most aggressive rate hike since 2000.

 

It should come as no surprise that inflation increased with the aim of reigning it in. There was sure to be a point when the cheap money flow would slow down.

 

As Canadians are accustomed to cheap money, they carry record levels of household debt, and they are forced to contend with rising prices in almost every area of their lives. It’s a sobering moment made all the more intimidating by the fact that this is simply one of a number of rate increases that will likely take place this year.

 

The mental strength required to make a purchase in cities like Toronto, where housing prices are objectively outrageous, has long been a barrier for buyers. Now, if we add uncertainty and fears of market correction as we remember from the 2008 subprime mortgage crash in the US, that fortitude will surely give way to pause.

 

The marketplace is now devoid of urgency. There is no FOMO anymore. There are still buyers out there, yes, though perhaps in smaller numbers but more inclined to wait for the right moment. There will certainly be a sale for those houses, but it will not be in the manner we’ve grown accustomed to.

 

We are unlikely to see a sharp or immediate decline in prices unless the rate hikes continue to come hard and fast. Multiple offers on good homes in desirable areas are likely to remain so long as inventory is low and there are qualified buyers. However, the days of bidding wars over signs on lawns might be over for now.

 

It will be fine for the deep-pocketed and institutional investors who recognize real estate investing is a long-term investment. It isn’t going to be possible for people in over their heads to ride this out.

 

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