How Interest Rates are Impacting Home Buyers in Canada?

Highlights:

1.      Interest rates – What next?

2.      First time homebuyer’s dilemma

3.      Growth in Rental Market

4.      Are Mortgage Payments unsustainable?

Interest Rates – What next?

Last interest rate hike in June 2023 resulted in slowing down the activity in the real estate transactions, as indicated in my earlier newsletters and subsequent posts. 

Market reacted positively after the Bank of Canada put a conditional pause in January earlier this year. The real estate market witnessed an increased activity during the period from March to May 2023. However the recent rate hike has negatively impacted the sentiment. 

The Bank of Canada is continuing to pursue the strategy of monetary curtailment, to bring the inflation down to the target range of around 2%. However, such monetary measures have a limited impact on consumer demand. Fuel cost and household/grocery expenses continue to rise and demand for rental properties resulting in the higher rent . With the job market not showing any sign of weakness, we expect to see inflation continue to stay over and above its desired targeted level. 

There are other factors which are driving up the inflation which are not sensitive to the interest rate hike and hence the question is not whether the Bank of Canada will increase rate again or not. 

The more relevant question is what else could be done to control inflation other than the interest rate hike?

First Time Home Buyers Dilemma:

Undoubtedly, the number of first-time homebuyers will continue to increase. There are more newcomers landing in Canada every year. They need housing. Some of them will opt to buy homes, some will consider renting as an option. 

Royal LePage’s recent survey about first-time homebuyer’s sentiment shows that 67% respondents feared the down payment would be an issue for them. Survey also suggests that, within the next five years, approximately 25% of Canadians have intentions to invest in real estate. Of that, around 30% will be purchasing property for the first time.

As mortgages are becoming more expensive, their dilemma continues!

Growth in Rental Market:

Tahir Guendogan from BMO Financial Group shared an interesting data illustration about the link between the change in landlord’s real income and Canada’s CPI Rent.

He wrote in his post, “Higher interest costs have put some delays on the ability for people to be able to afford the home they want. This has put pressure on the rental market where we are now seeing a rapid rise in landlords real time rental income, i.e. the ability to increase rents and pass that on. This has flowed through to increases in CPI Rent component which is continuing to put upward pressure on rent.”

Having said that, the need for housing is expected to show an upward trend during summer months as newcomers prefer to arrive between April and November.

In my opinion, rents will continue an upward trend for the rest of 2023!

Are Mortgage Payments Unsustainable?

The Royal Bank of Canada recently warned of the risk that mortgage delinquencies rise by more than a third over the coming year.

As more mortgage borrowers are paying their monthly mortgage consisting of interest only, they will have a challenging time on their mortgage renewal date. Talk to your bank and discuss your options.

Challenging times ahead for all of us.

My advice is that we should exercise more caution in our decision making as we move forward to the second half of 2023 and rationalize our cash flows and expenses across the board. 

Enjoy reading and am happy to hear your thoughts.

See you in the second half of 2023!