Capitalizing on the highs of the real estate market

In August 1981, the variable mortgage rate reached a record high of 22.75 per cent. And, in the early 1980s, the average price of a house in Canada was $75,000, with prices doubling by 1989.

The lowest fixed mortgage rate for a five-year term of 2.44 per cent was available 40 years later in 2021. Emergency actions by the Federal Reserve helped to keep mortgage rates below three per cent during the pandemic, but since 2022 a sizzling inflation has caused interest rates to reach their highest level in 20 years.

BEST LAID PLANS

So often we seem to be on one trajectory, and then that very thin dime takes a proverbial turn, and we find that our projected budget just flew out the window, along with a desired acquisition that had been on our wish list for quite some time. Time to rethink and come up with a new strategy.

Following the most recent interest rate increase on July 12, even Bank of Canada governor Tiff Macklem seemed uncertain. “These decisions are difficult. And we did discuss the possibility of holding rates unchanged and gathering more information to confirm the need to raise the policy rate.” He went on to say, “On balance, our assessment was that the cost of delaying action was larger than the benefit of waiting.”

NAVIGATING A NEW PATH

With the latest hike, BoC is predicting that inflation will hold at approximately three per cent for the coming year, and should return to two per cent by the middle of 2025. In the meantime, higher rates may lead to more interest on savings accounts and guaranteed investment certificates. While many Canadians are remaining cautious and curbing their spending on travel, entertainment and leisure activities, many are still benefitting from increased savings and reduced spending habits as a result of the pandemic. Household savings rose approximately $350 billion above pre-pandemic levels by the end of the third quarter of 2022. In the second quarter of 2020, the average saving rate of a Canadian household was 26.5 per cent, compared to an average of 6.2 per cent by the second quarter of 2022.

POSITIVE RETURNS

For those who are considering buying a home, especially a pre-construction home, there are advantages to purchasing now. The higher interest rates of today will likely be on the decline by the time you have to close in two to four years, but you are benefiting from the wide availability of units and the variety of incentives being offered today.

On the resale side, listed homes are remaining on the market for longer periods of time, offering buyers respite, as well as alleviating the recent supply crunch. Plus, some homeowners may choose to sell, to ease their financial burden, which will also bolster available options.

A one-per-cent increment in mortgage rates often correlates to a five-per-cent reduction in price, or a slower rate of increase in sale prices. Ultimately, buying a house when housing prices have dipped due to an interest rate hike, may yield larger profits down the road.

I’ve said it before and I’ll say it again – buy real estate and wait, don’t wait to buy real estate.