Since the spring, we’ve seen one interest rate increase after another. What does this mean for buyers, sellers, and anyone who’s about to sign up for a new mortgage?
By Martha Uniacke Breen
Since March, the Bank of Canada has raised its benchmark overnight bank rate from just 0.25% to (as of this writing) 3.75%. If you’ve got a variable-rate mortgage or HELOC, or even a credit card with a floating rate, you’ve watched the rates you pay rising in lockstep. The days of cheap borrowing appear to be at an end… at least for now.
Imprecise as they are, interest rates are the only real tool the Bank of Canada has to fight the one factor it is mandated to control: inflation, which rose following the pandemic to a high of over 8% earlier this summer. The short-term pain we’re experiencing as we watch our mortgage payments ratcheting up is, presumably, a small price to pay to tame the inflation tiger. But does three and a half percent in barely six months count as small?
“Normally, the Bank would be raising rates by smaller increments, say a quarter or a half-point each time, then watching to see what would happen,” notes Toronto mortgage broker Jason Georgopoulos of Dominion Lending Centres. “But they have been very aggressive lately, raising them by 75 or even 100 basis points at a time. Part of the reason is they waited too long, frankly. They saw inflation rising but hoped it would be transient, but it hasn’t gone away. It’s now at a level we haven’t seen in 40 years.”
Inevitably, all this is having an effect on the economy in general and the real estate market in particular – with both demand and home prices taking a hit. “Prices have been impacted as much as 15-20% in some neighbourhoods,” observes Grace & Co. sales representative Ian Blakey. “Basically, we’ve lost all the gains we made since July 2021.”
He’s also noticed that properties that last year might have sold in a few days and had multiple offers are now taking as much as a month to sell, and returning asking price or less. “It’s a free market, and the market will speak,” he points out. “Buyers usually have a clear idea where the market is, so prices are going to reflect that.”
Blakey’s advice to sellers is that the heady days of multiple bids over asking and quick sales are over; buyers are looking for value, and sellers should be prepared to negotiate. On the other hand, especially in Toronto, inventory has dropped, which means the demand is still there. “If your house is really attractive, well-maintained or beautifully renovated, you’ll have no trouble selling. It’s the ones that might need work or have other issues that may sit on the market for a while.”
But buyers needn’t get too comfortable; you’re not quite in the catbird seat, either. “Some buyers might want to wait, thinking that prices will go even lower,” says Blakey. “But the only way to really tell when you’ve hit the bottom of the market is when you are looking back! If you want a particular house, it’s never a good idea to wait.”
If you’re in the market for a new mortgage, or you’re about to renew an existing one, knowing where rates are headed for the end of 2022 and beyond is the $64-million dollar question. But Jason Georgopoulos is cautiously optimistic that the current tightening won’t last forever.
“Most people believe there will be another raise before the end of the year. The economists I follow say that they’ll stay there pretty much throughout 2023, then start to come down. If they come down sooner, that will be a bonus, but I’m telling my clients to count on rates staying steady throughout next year.”
If your budget can weather a modest increase, Georgopoulos advises most clients to go for a one-year fixed or variable; the advantage of a variable, of course, is that if rates come down sooner, you can lock in at any time. A more conservative approach would be to go for a two-year fixed. “Virtually all economists are saying that rates will be back down by 2024.”
While Georgopoulos notes that in 2024, rates should be receding, Blakey points out that while prices have fallen back, monthly payments are about equal to earlier this year. In other words, the rise in rates, in many cases, has been counterbalanced by lower home prices. In effect, if you purchase over the next six months, you’ll benefit from the price drop – and when rates do come down, so will your payments (or accruing interest, depending on the type of mortgage you have).
“There isn’t any benefit to waiting out the rates,” says Blakey. “Ultimately opportunity knocks, and those who are bold enough to go against the current will likely be rewarded in the future.”
Meanwhile, the latest figures show that inflation is slowly, but measurably, responding to the Bank of Canada’s foul-tasting medicine of rate hikes. For now, there are indications that if we do head into a recession – the often painful side effect of interest rate hikes – it will be mild and relatively short-lived.
“Right now, the Bank of Canada seems to be saying that the risks of inflation are higher than the risk of recession, so that’s what they’re focusing on,” observes Georgopoulos. “But remember, the government is flexible, and known to change its mind.
“By the middle of 2023 or so, if they see that the recession is worse than they thought, they can always change their minds and start bringing rates down sooner.”