Home Prices Heat Up Despite High Interest Rates

By: ameer@trustedteam.com

Some weird stuff is happening in the world of real estate. As you likely know, the Bank of Canada has steadily raised interest rates over the past year in hopes of cooling inflation. This was also supposed to cool the housing market. Conventional wisdom dictates that higher rates would result in more mortgage defaults, more housing supply, and lower home prices. Oddly enough, none of that is happening. 

What’s Going On?

Despite the astronomical spike in interest rates, there are far fewer real estate transactions compared to this time last year. The number of new mortgages being registered has dropped significantly. The rental market has ramped up (a basement apartment in Toronto now goes for $2k – $3k/month, which is ludicrous). And most importantly, real estate prices have skyrocketed. Bidding wars are back in full swing, which is almost the exact opposite of what we expected to see from a rate environment like the one we’re in. 

Why Is This Happening?

There are a few factors at play here. One is that banks haven’t acted on mortgages where amortizations are negative or extended. In plain English, banks are protecting their borrowers. No one is defaulting on their mortgage, which keeps inventory tight and prices sky high. 

Another factor is immigration. We’re currently seeing record numbers of immigration with 952,000 people becoming permanent residents or landed immigrants in 2022. High numbers are expected to continue every year for the foreseeable future. With so many newcomers settling in major urban areas, there’s more pressure applied to an already stressed housing supply. 

What’s Next?

Nothing wrong with high home values, but these conditions mean we simply can’t keep up with housing supply and demand. It’s already insanely difficult to secure a mortgage, and the federal government wants to make it even harder with ridiculous proposals – like capping the amount you can borrow based on a matrix of 3 or 3.5 times your annual income. This would be devastating for middle to lower income Canadians. 

The Bottom Line

If you’re closing or renewing in the next 6 months, make sure you’re protecting yourself with rate holds. Fixed rates are highly volatile right now, so you don’t want to miss out. If you’re in the middle of your term but need a cash infusion, there are some great refinancing options out there. Make sure you get approved ASAP – chances are the value of your home has increased.

Rates will fall slowly over the course of a few years, but they could start falling as soon as the end of 2023. Will that lead to a breaking point? It’s hard to say. It seems like anything is possible at this point. If you ever need help navigating through the turbulence, I’m always around for a chat. 

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca

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