What do rising interest rates mean for prospective homebuyers?

For the past year and a half, we have seen mortgage rates at record lows, while homebuying activity skyrocketed in nearly every province. However, the Bank of Canada (BoC) recently announced that rates are expected to rise six to eight times in the next two years. How much they will rise is still in question, but many homebuyers are wondering what this all means for the Canadian housing market.

How will a rise in rates impact Canadian buyers and homeowners?

In simple terms, higher rates result in higher mortgage payments, which may decrease home affordability, depending on a buyer’s financial situation. For Canadians who were able to secure a new mortgage at a lower rate during the pandemic, an increase in rates could impact their ability to keep up with their existing payments. For first-time buyers, specifically, while higher interest rates may be an additional roadblock to getting approved for a mortgage, it could also work in their favour.

Can this potentially decrease home prices?

The hot housing market we’ve experienced over the last year is largely the result of record-low rates and the exuberance it created in the market – which ultimately boosted affordability for buyers. Nevertheless, home prices were still considerably higher than previous years. With rates expected to increase over the next little while, it raises the question of whether home prices will decrease.

A lot of research is currently pointing toward slow price growth. A report by Moody’s Analytics and Real Property Solutions confirms that this is what they expect for much of 2022. With inflation increasing as much as it is – which is generally a sign of further rate increases that the BoC recently confirmed – this should stabilize the market and lead to a drop in prices as well. This could be good news for first-time buyers, as it could potentially increase their affordability.

Inflation has also shot up in the U.S. above expectations and the U.S. Fed is finally coming to terms with it – even though industry pundits expected this all along. The rise in inflation throughout the pandemic has often been referred to as “transitory” or “short-lived,” but it’s looking as though it is here to stay for a while longer. If and when the value of the dollar changes, this could also impact home prices.

Will higher rates slow the housing market?

While the market adjusts to higher rates, a short-term slowdown in buying activity could take place. Something that isn’t often talked about is that low supply is related to the lack of Canadians selling their homes because they can’t afford to move, given recent higher prices. If prices drop across the board, while the current value of homes may decrease as well, more expensive homes will become more affordable, as a percentage of total price is based on a larger number. In this case, Canadian sellers will be more inclined to put their homes on the market, search for a new home and parlay the earnings into their next purchase, which may be more affordable than it was in the previous months.

A rise in rates could also motivate buyers to rush into the market and lock in low rates while they’re still available, which is what we’ve been seeing at Homewise recently. If rising rates are a concern, getting pre-approved is a great way for buyers to lock in a rate and avoid any unexpected increases for at least four months.

At the end of the day, the future of the Canadian housing market remains uncertain in the face of rising rates, and no one knows for sure what exactly what will take place. With the last two years under our belt, we are no strangers to uncertainty and proved resilient in navigating uncharted waters. All we can do now is use the information available and make sound financial decisions when it comes to buying and selling our home.