Recently, every new announcement from the Bank of Canada has left prospective homebuyers nervous that changes will affect their plans to purchase a home. Global economic shifts and uncertainty have put pressure on economies worldwide, leaving consumers with concerns on home affordability under the current conditions. On June 1st, the Bank of Canada announced another rate hike of 50 points to combat inflation. Despite this imposing update, there is hope on the horizon for homebuyers here in the Lower Mainland. Canadian economic activity remains strong, and the economy is operating in excess demand. Here, we’ll share an overview of the change and speak with Mortgage Specialist Scott Gingles, Owner of Nest Mortgage, on his recommendations for navigating the evolving market and understanding what’s to come.
Canada’s quantitative tightening to continue
Yesterday, the Bank of Canada increased its target for the overnight rate to 1.5%, with the Bank Rate at 1.75% and the deposit rate at 1.5%. It also noted that the Bank will continue its policy of quantitative tightening to combat inflation. The Bank cited global and national inflation, driven largely by increasing energy and food prices. Russia’s invasion of Ukraine, COVID-19 lockdowns in China, and continuous disruptions to the supply chain are some of the key drivers of inflation. Agricultural and energy commodities are seeing intense pressure and demand due to uncertainty around the war. As financial conditions tighten internationally, markets have become volatile.
Increasing the interest rates puts pressure on Canadian consumers to slow down spending and borrowing, and the Bank will use its monetary policy tools to curb inflation. The good news is the Canadian economy remains strong, despite media frenzy. Similarly, the housing market remains strong but is beginning to moderate from recent extraordinarily high levels.
More opportunity to enter the market presented
Anyone looking to buy a pre-sale home in the Lower Mainland should not be fully dismayed by this hike. Up until this spring, the pre-sale market was incredibly heated and competitive. We saw an approximate 20% appreciation year-over-year across all home product types. When interest rates are low, home prices go high. This quantitative tightening, despite being the most aggressive we’ve seen in 20 years, is more of a market softening tactic that will bring about a more balanced market, especially for pre-sale homebuyers. Rather than weaken the market, this move allows it to soften from a previously unsustainable level of activity. We’re already seeing that shift begin, with less competition for each home and a reduction in frenzied bidding wars. Overall, this creates more opportunity to enter the market. Yes, it may be more onerous to qualify for a mortgage and monthly mortgage payments may be higher, but the value of the overall purchase price of the home being securing will make up for it. It’s important to remember that the market is still experiencing a lack of supply.
In the wake of post-hike panic, it's necessary to note that rates still have a way to go before they reach pre-pandemic levels. Wage growth has been increasing and broadening across industries, which may counteract the financial pinch of increased rates. Pre-sales particularly are still moving quickly, but with more ability to access them without a feeding frenzy.
What the hike means for homebuyers looking to enter the market
Scott Gingles, Mortgage Specialist and Owner of Nest Mortgage, has been working with his clients to explain what the interest increase means and how to best navigate the current landscape. Scott and his team anticipated the 50-point spike and expect additional increases before the year is out. “We still recommend a variable mortgage over a fixed one, as many variable rate holders will be at around 3% or lower,” shares Scott. “Historically, the variable rate holds the best prime rate which ranges from 2.25% to 4.5%.” Variable rates continue to be the lowest rates available. However, if you’re not able to manage the uncertainty of a variable rate, you’re not alone. Most Canadians prefer fixed rate products and are willing to pay more in the name of consistent, predictable payments. “If you owe a considerable amount to your HELOC, it may be a good time to consider converting a portion of the balance into an amortized variable or fixed mortgage,” added Scott. Before making any mortgage changes or securing a new mortgage, it’s always recommended to speak with a Mortgage Specialist who can expand on the particulars of your unique circumstances.
Those looking at buying a pre-sale soon should consider the financial resources available to prepare for purchasing in this market. As you evaluate your options, it’s important to consider not only what your monthly payments would be at the current interest rate, but also what you could or could not afford if rates continue to go up. It’s worthwhile to connect with your Mortgage Specialist as soon as possible to lock in a pre-approval that protects you from potential future rate increases while you make your final decisions.
For more information on the implications of the Bank’s interest rate on mortgages, Nest Mortgage offers additional information on their website. Anyone seeking to purchase a pre-sale home need not give up hope, as industry experts are prepared to help homebuyers navigate any current and potential market conditions. Speak with your mortgage specialist, realtor and any MLA representative to identify the best opportunities for you.