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Personal finance

Navigating the housing market as interest rates rise

May 12, 2022

Spring is usually a busy time for real estate, but as house prices remain high and Canada's central bank continues to raise rates to fight inflation, current owners and prospective buyers are guessing about where the market is going and whether pandemic trends will hold.

Back to the city?

According to Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, during the pandemic people had fewer expenses, not spending on commuting, travel, dinners out or sports for the kids, so they had excess savings to put into their homes.

At the same time, there was a trend in people moving away from big cities and high-rises to smaller towns, and a rush of first-time buyers locking in low rates who were willing to look for housing farther away from home. "People are less focused on finding somewhere close to the office and more focused on a home with enough room to work comfortably, and with the amenities they're looking for in their lifestyles," says Stephan Plante, Desjardins Ontario Credit Union's Vice-President of Retail Banking.

But a lot of people who did relocate would rather stay than move back. And they might not want to take on a long commute and pay higher gas and transportation costs. In fact, prices in Canada's big urban centres have been outpaced in smaller cities, which have seen incredible gains in the last year or so.

Brian Diehl, Territory Sales Manager at FairSquare Group Realty, a real estate brokerage, sums it up, "While buyers exited large cities for lower price points, the gap in price was closed quickly from extensive price hikes, taking advantage of increased demand." It remains to be seen how much all of that will change, as people head back to the office, back to school, and back to the amenities in the city.

Supply and demand

Data from March shows that an inventory problem persists, another factor impacting house prices. Plante says there's been increased interest in refinancing solutions, as some owners want to capitalize on the values of their homes and buy income properties. Diehl also highlighted a trend of new development and construction in smaller rural towns taking off over the past 2 years.

Buyers anticipated the hikes and acted early, so demand may cool now that higher rates are here. And as people go back to work, there should be more new builds that add housing inventory and help ease bottlenecks in supply. "Overall, as the pandemic recedes, we should see a bit more balance in the market this spring and summer, but it's going to be hard to disentangle the impact of rate hikes on housing from the post-pandemic normalization, as society continues to open up," says Mendes.

Rate hikes

After reassessing COVID restrictions, jobs, price points and inventory, how can buyers navigate rising interest rates? The level of household debt in Canada makes any increase significant. People who will most likely be impacted have a lot of debt, have bought recently or have taken out variable-rate mortgages.

Plante suggests that buyers need to consider their comfort level before they decide on a variable- or fixed-rate mortgage. If their budget is already tight, it might be a better idea to lock in a fixed rate for the peace of mind that comes with it. However, with interest rates on the rise, fixed rates are also climbing upwards. It's important to discuss the pros and cons of different mortgage products with a financial advisor.

An additional psychological barrier for younger buyers is that they've only ever known low rates. It's important to understand that markets fluctuate all the time and will continue to do so over the course of a 25-year mortgage. "Other than inheriting a large influx of money, there's just no way of avoiding it," says Plante.

Planning to buy?

The bottom line is that people who want to buy a home should still follow the traditional rules. Save for a solid down payment; the more they can save now, the lower the borrowing costs will be.

"While interest rates continue to climb, it seems to have created a shift in the real estate market, selling prices look to have peaked over the past 30 days, and in fact some price corrections are occurring now. This is leading us to a more balanced market where listings are not moving as quickly, giving buyers more properties to choose from and less competition to deal with," says Diehl.

While it may feel out of reach now, there are new support programs in development. Plante mentions that the most recent federal budget includes the creation of a new Tax-free First Home Savings Account, which combines features of an RRSP and a TFSA. Since it hasn't been implemented yet, the details are subject to change. However, it's planned to launch in 2023 for Canadians aged 18 and older, who can use it to save up to $40,000 for a down payment, invest that money and withdraw it tax-free for a first home purchase. And there's no requirement to repay it. Buyers should use every advantage they have to get into the market.

They should also make sure they stay within their budget and be prepared to look at homes which may not be the ideal fit or location for now. It gives them a chance to start building home equity, with a plan to move up when conditions look right. Finding the right REALTOR® is also important, and they should make sure it's someone who will help them develop a solid plan and educate them on market conditions and opportunities.

*This article was created for informational purposes only. It is recommended that readers discuss their financial decisions with a financial advisor.