With interest rates rising at the most rapid pace in the last two decades, a lot of buyers are afraid, uncertain and unable to afford the home they’ve been looking for since the beginning of the year. On the other hand, vendors are getting a reality check concerning the value of their properties. Today more than ever is a time where I get asked “What do you think is going to happen?” The honest answer is no one knows, but here goes my opinion.
Firstly, Canada is definitely headed into some sort of soft recession, and it will definitely be a weird one. It will be a recession where people won’t have a hard time finding a job because demand for employment is high, it will be a recession that brings the younger population back into reality where streaming video games and posting content does not pay the bills and getting a job as a nurse, an electrician or a plumber does. Our country is definitely in a weird place, but we will, as always, get through it within 12-24 months.
Changing market for buyers:
For those of you who think that you waited out the increase in prices and won because of it, you are in for a shocker… The interest rate increase has more of an affect on your budget than high prices will ever have and as a broker I see it affecting my buyers choices more than ever. To give you a little idea about how much affect the recent changes make, please see below!
Mortgage: $500,000 / Down Payment: 20% / Interest: 3% = $1,892.98/Month vs. Mortgage: $500,000 / Down Payment: 20% / Interest: 4.8% = $2,281.09/Month
Yep, thats right it will cost you $388 more per month for the exact same property today, than it did in March, If you had to overbid by 20,000$ in March to get your property at 2.89% interest rate, it would have only cost you 40$/month more!! The best way to put it is that buyers budgets and comfort levels will be affected, hence the next section.
Changing market for sellers:
As obvious as it may seem, if buyers budgets are affected, the sale price of properties will end up being affected eventually. We have seen a gradual slow down starting in April, but now as I write these words on June 7, 2022 – We definitely feel the full force of the market turning left. It is important to understand that since the pandemic began in March 2020, our province has seen an increase in prices that made almost no sense. Now what I expect to happen is very simple. In March 2022, if your property was asking $599,900 you could have expected to sell on average 2-4% above asking price depending on your neighbourhood. This means your sale price would have been somewhere between $612,000 – $630,000. Today, and it is already happening, buyers will not want to rush into visiting a property because they’ll assume that a bidding war follows, so they will wait, and if no one offers they will come to see your property and be happy with a 1-2% negotiation margin, bringing the price of your home down to $585,000. In turn, we can think of that as a 6% decrease in value. How do we counter this? easy, understand that the past 2 years has been an inflation of pricing and your property selling 15k under asking in under 30-45 days is not a bad thing, In fact, historically properties took anywhere between 60-150 days before 2020.
The market is changing, but real estate will always remain a great investment. Buyers, adjust your budgets and move forward, sellers, adjust your expectations and you wont feel let down.