Interest Rates Just Went Up AGAIN – Keep Calm!

Published on 14th November 2017

Last week, literally right after I had filmed the September Market Watch, news of an interest hike surfaced: “Bank of Canada hikes interest rates by 0.25%“. Note that you may not see the number 0.25% written in article headlines because the media will most likely be writing about interest rates now being at “1%” instead (i.e., it was at 0.75% previously). A lot of my clients and friends alike have been asking me about what to do with this interest rate hike, since this is the second hike in just 4 months.

What should you do? My response to most people is that you shouldn’t fear interest rate hikes. Every 0.25% hike will increase your monthly mortgage payments by $13 for every $100,000 that you owe.

Let’s take a look at an example. So if you bought your home for $500,000 with 20% down, your mortgage is $400,000. This means that your increased monthly payments is $52/month ($13 x 4). If you can handle that, don’t be afraid of the interest rate hikes.

Keeping in mind when you bought your house, your mortgage lender likely stress-tested you based on your income and gross debt ratios to make sure you could handle a rate hike. If you’re contemplating about going to a fixed mortgage because you’re afraid of another hike, go for it if the difference is less than 0.50% and you can get that peace of mind. Otherwise, variable rate mortgages are historically known to be more cost-effective over time. This is assuming you don’t need to break your mortgage in the near future (i.e., sell or tap the equity).

Another hike, again. Why?! You might be asking yourself, “why did the Bank of Canada increase interest rates again?” Is it to cool the real estate market? Oddly enough, many people actually think that’s the reason. But quite frankly, it’s not. Although real estate is affected by interest rate fluctuations (through mortgage rates), it’s not the main reason why rates went up. Interest rates went up because Canada’s Gross Domestic Product (GDP) grew at a pace that we’ve never seen before in years. It grew 22% in the last quarter. We’re on pace to see the highest GDP growth in years. Our GDP is growing 50% faster than the US!

What does this mean for the real estate market? Below are two reasons why you shouldn’t fear interest rate hikes.

1. The economy is growing and this is great news. You can afford to borrow less money now with higher interest rates, but this is a sign of Canada doing better economically. Plus, we haven’t seen the Canadian dollar above $0.82 to the US dollar in a LONG while. Last time this happened was May of 2015 (Our dollar is finally worth more now when we travel!! Woohoo!).

2. Real estate is the new crutch of Canada’s GDP after oil. Even though many economists don’t talk about it, real estate is now the biggest contributor to Canada’s GDP since 2016. You can see it in the chart below.

We all know interest rate increases inadvertently affect the real estate market. Without a doubt, the buyer’s heart beats a little faster when they see news of interest rate increases. It’s the smart investors that keep buying in times of fear and crisis.

Should we expect more interest rate hikes? I have a few thoughts on this one, and they are as follows:
It’s hard to say, but I don’t think there will be another interest rate hike. I would like to put a caveat on that and also say that it’ll depend on the GDP reports that come in after the Fall season. If they are on pace with increase we just experienced in the summer, Bank of Canada will likely use this excuse to increase the rate in case we have a financial melt down in the future. This allows them to lower rates to stimulate economic growth in dire times. Once rates go down, real estate prices will always go up.

The buyer’s psychology is obviously affected with these hikes, but the determining factor is the game of chicken that is being played right now. Sellers have not budged on their prices for new listings. Despite the media saying that prices have decreased 20%, I have not walked into a million-dollar house priced at $800K. These sub-one million dollar houses are still selling with offer dates and usually over-asking!

The Wrap – I don’t have a crystal ball, but deep down, I honestly believe real estate prices will go up for all of the wrong reasons. I’d rather own the asset and have control over my destiny, instead of wasting time freaking out over every interest rate hike. If you have a robust investment plan in place, you can overcome any obstacle thrown at you. If you’d like to chat more about ironing out the details of your plan, feel free to reach out to me, and I’ll work with you to see how I can help service your real estate goals!

Happy Real Estate-ing, everyone!

Zhen

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