If you are planning on Buying or Selling, there are many things to consider when interest rates are rising. This is even more true with the new “stress test” regulations implemented earlier this year. If you just imagine that everything else in the economy and every other factor affecting your sale or purchase remains constant, and the only change is that interest rates rise, then this will have a negative impact on home sales and home prices. Bottom line, when rates rise, the amount of people in the market shrinks. If it does not shrink, it at very least forces one to lower expectations.
Since 2009, we have seen the prime lending rate in Canada go from a low of 2.50% creep up to 3.45%, with 3 increases since last July.
As a rule of thumb, if interest rates rise 1% and all other factors remain constant, purchasing power for home buyers will decrease by about 11%. So, every time rates rise by a ¼ percent, it effectively reduces purchasing power by about 3%.
So, if we are using a $500,000 home as an example, that means that if rates rise 1%, the buying power would go to about to about $445,000. So, someone who potentially shopping for a home, may have to look for a less expensive home and someone selling may have lower their expectations. This creates larger supply, and lower demand.
If mortgage rates rise, it becomes more probable for indecisive buyers to rush into the market, and the short term will likely see a decent boost. However, it could add extra pressure if rates continue to rise without leveling out.
But….
Although interest rates play a role in the housing market, there are many personal and economic factors to consider as well. This makes it almost impossible to gauge the effect of a rate increase simply on its own.
Historically, when interest rates rise, it does not necessarily trigger a decrease in home prices. If you compare average mortgage rates against average home selling prices, there are many instances when home prices actually increased after the rise in interest rates.
How could this be?
Well, again, personal and economic factors. It not only about the rate. Home prices and sales are greatly influenced by the overall strength of the economy, which is likely why rates rose to begin with. Good economy usually points to inflation which triggers rate increases.
In the end, what to do? If you are planning on purchasing and rates are rising, you are hopefully part of the overall economy sediment and your income is on the rise. Or, you are conscious about your affordability and budgeting and will find a home in your range. If you are selling, you may have less buyers knocking on the door, and you may have a longer selling period, but you don’t have to necessarily panic and make drastic price reductions or change your plans.
Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (905) 265-0246.
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