Storm Clouds
I don’t think anyone will be surprised to hear that mortgage rates have more than doubled over the past year and are predicted to rise further. The next Bank of Canada meeting is on October 26th, and it’s expected to increase the rate by another 75 basis points. The impact of higher rates is significant and monthly payments can be increased as much as 40% compared to last year and this will be higher in a few months.
September 2021: $100,000 @ 2.60% with 30-year amortization = $399 per month
September 2022: $100,000 @ 5.44% with 30-year amortization = $560 per month
The bigger impact is on the qualifying rate lenders use for mortgage financing which has reached over 7%. This is making it very difficult to qualify for a prime rate financing. At the end of August, the benchmark price of a condo in Greater Vancouver was $740,000 and $1,954,000 for a detached home.
To qualify for a prime rate mortgage at these benchmark prices with a 20% down payment:
For condo you need income of at least: $192,300.
For a detached home you need income of at least: $452,000.
Of course, these high rates are having an impact on the Real Estate market. Sales have been falling steadily since the Spring and prices across the Country are starting to fall. Some areas have been impacted worse than others, but it may be only a matter of time before we see prices fall everywhere.
Will the increases in rates start reducing the rate of inflation? Eventually the rate increases will do the job to tame inflation, but the challenge is with the timing. Our Governments of all levels continue to fuel inflation with money printing policies. I don’t think any economist would feel that a deep recession isn’t on the horizon for Canada and the world. It is usually the recession that will cause inflation to fall.
Another huge issue we are facing is housing affordability. The solution for housing affordability was determined to be to increase the supply of housing. The rising costs of construction of new homes has resulted in many developers and builders to cancel and/or pause projects throughout the Country. As our population continues to grow; this will cause a supply problem in meeting the demands for housing putting upward pressure on prices.
With that being said, I recommend anyone looking to make a home purchase consider doing so this winter and take advantage of a softer market. Bottom line: the demand for housing should continue to accelerate, so whether you are a buyer or renter; expect to pay more.