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Navigating the Interest Rate Rollercoaster

Friday, March 01, 2024

How Interest Rate Fluctuations Impact Canada's Real Estate Market

In the dynamic landscape of Canada's real estate market, few factors wield as much influence as interest rates. In recent years, the market has witnessed significant fluctuations in interest rates, with 2023 marked by increases and 2024 projected to see decrease, but is currently (at the time of writing this article) stabilized with no sign of moving down. Understanding the ramifications of these changes is crucial for homeowners, buyers, sellers, and industry professionals alike.  In this blog post, we'll delve into the impact of interest rate fluctuations on Canada's real estate market and explore what the projected decrease in interest rates in 2024 might mean for various investors.

Interest Rate Increases in 2023:

The year 2023 was characterized by a series of interest rate hikes by the Bank of Canada in response to various economic factors, including inflationary pressures and strong economic growth.  As a way to slow the growth of un-affordability, the government had no choice but to raise interest rates.   These increases led to higher borrowing costs for homeowners and prospective buyers, resulting in a cooling effect on the real estate market. Mortgage rates rose, to 20 year record numbers, making it more expensive for individuals to finance home purchases, refinances, lines of credit and just about everything else related to real estate.  Consequently, demand softened, and housing affordability became a growing concern, particularly in major urban centres like Toronto and Vancouver.  Sellers found themselves facing longer listing times and potentially lower prices as buyers became more cautious in their buying decisions.  The result...sales for single family residential homes fell by 45% compared to 2022...not great if you are a seller, and not great for buyers either.  The lack of inventory and high interest rates meant that if you were brave enough to enter the market, you were paying a premium for an inferior product, not a great way to jump into real estate.

Projected Decrease in Interest Rates in 2024:

Looking ahead to 2024, economists and analysts forecast a reversal of the trend seen in the previous year. Projections suggest that the Bank of Canada may opt to lower interest rates in response to shifting economic conditions, including moderating inflationary pressures and global economic uncertainties. A decrease in interest rates would likely translate to lower borrowing costs for consumers, including those seeking mortgages. This, in turn, could stimulate demand in the real estate market, as lower financing costs make homeownership more attainable for a broader segment of the population. Prospective buyers may find themselves in a more favourable position, with increased purchasing power and potentially greater confidence in entering the market.​  This of course is all hypothetical, no one can predict the future, and it becomes even more difficult to predict a possible trend as the government's decision have been contrarian in nature going against common sense economic fundamentals that would result in faster growth in the economy and a reduction in unaffordable real estate prices.  That's a story for another article!  A piece of advice from my nearly two decades in real estate, you want to buy as much real estate as you can afford, no matter what is going on in the economy.  There is an old saying, you marry the price and you date the rate.  Once you make a purchase, the price you paid can never change.  However, the rates you pay can and will come down, making the investment even more attractive.  Imagine knowing what we know now, how much real estate would you buy 20 years ago...I bet you said A LOT!!!

Impact on the Real Estate Market:

The projected decrease in interest rates in 2024 is expected to have several implications for Canada's real estate market:

1. Increased Demand: Lower borrowing costs are likely to spur increased demand for homes, particularly among first-time buyers and those looking to upgrade their current living situations. This uptick in demand could lead to a more competitive market environment, with multiple offers and potentially higher selling prices.  You don't want to wait, get in now.

2. Boost to Housing Affordability: Reduced mortgage rates can improve housing affordability, making homeownership more accessible to a wider range of Canadians. This could benefit both buyers and sellers, as a larger pool of prospective buyers enters the market, allowing to reduce the over supply in the market right now.

3. Regional Variances: While the overall trend may point towards increased activity in the real estate market, regional variations are expected. Markets in major urban centres may experience more pronounced effects due to their higher levels of demand and price volatility compared to smaller cities or rural areas.  The cities always move faster in both directions.

4. Investor Sentiment: Lower interest rates may also influence investor sentiment in the real estate sector. With borrowing costs potentially decreasing, real estate investment may become more attractive compared to other asset classes, leading to increased investment activity in residential and commercial properties.  Rental rates have gone way up, 27% increase in the last two years, and with rates dropping, the cashflow yield will be huge.

5. Government Intervention: Policy responses from federal and provincial governments may also shape the impact of interest rate fluctuations on the real estate market. Measures aimed at cooling overheated markets or promoting housing affordability could mitigate some of the effects of interest rate changes.  A word to the wise, no matter how well you have something figured out, you can always rely on a bad government to take your fun away.

In Conclusion: What to Expect Moving Forward

As Canada's real estate market braces for the projected decrease in interest rates in 2024, real estate investors must remain vigilant and adaptable to navigate the shifting landscape. Whether you are a homeowner, buyer, seller, or a full time industry professional...we all should closely monitor market developments and adjust your strategies accordingly. While lower interest rates may present opportunities for some, they also bring challenges and uncertainties that require careful consideration. By staying informed and proactive, real estate investors can position themselves to make informed decisions and thrive in Canada's ever-evolving real estate market.

Until next time...

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