Bank of Canada Interest Rate Increase

Bank of Canada Rate Increase: The impacts on buyers, sellers and the housing market

In Canada by TheRedPin14 Comments

Bank of Canada Interest Rate IncreaseOn July 12th, the Bank of Canada raised its key interest rate from 0.5 per cent to 0.75 per cent. The modest quarter of a percentage point hike, which marks the first interest rate increase from the central bank in seven years, was highly anticipated by economists following not-so-subtle hints by Bank of Canada Governor, Stephen Poloz, that a rate change was imminent.

The Bank of Canada’s decision to move the cost of borrowing upward signals a positive outlook for the country’s economy. In an official statement, the central bank said “Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed.”

Traditionally, interest rates are only kept low in times of economic downturn or stagnation, when the low cost of borrowing can help boost demand for goods and services as well as spur on higher levels of consumer spending.

Up until now, rock-bottom interest rates have played a seminal role in fueling Toronto’s hot housing market. So, naturally, the question on the minds of many homeowners (as well as prospective buyers) is how does this increase impact mortgages and the real estate market as a whole.

Impacts of the Interest Rate Increase

 

On Homeowners:

The impacts of the interest rate hike vary depending on your mortgage type.

  • Fixed-rate mortgages

For homeowners with fixed-rate mortgages, there’s absolutely no immediate impact. Your interest rate is already “locked in” and won’t fluctuate based on changes in the key lending rate for the extent of your mortgage term (usually set at five years).

What if your fixed-rate mortgage term is set for renewal soon? The good news is that even after the recent hike, interest rates today are still considerably lower than what they were five years ago when you last locked in your rate, so odds are, you won’t see a spike in payments.

  • Variable-rate mortgages

If you’re among the roughly 30 per cent of Canadian homeowners with a variable-rate mortgage, you will face an increase in how much you pay monthly.

Variable-rate mortgages are dictated by the prime lending rate and when the Bank of Canada’s key lending rate goes up or down, the prime rate follows suit.

So while homeowners with variable-rate mortgages have been able to take advantage of record-low rates since 2010, they will now see an uptick in payments.

How much of an increase?

Industry insiders suggest monthly payments for the majority of variable-rate mortgages will see an increase of several tens of dollars to just over one hundred dollars per-month. However, the change in payments largely depends on your home price, deposit amount and a myriad of other factors.

TheRedPin’s Principal Mortgage Brokerage, Andrea Jolly, drew up the following scenario below (based on the key prime lending rate) to showcase what the effect may be on your wallet. It’s worth noting, we offer competitive rates lower than the example presented in the graphic and the figures are for illustrative purposes only.

Changes to Variable Mortgages

On Homebuyers:

In anticipation of the hike, many banks already made adjustments to their fixed-rate mortgages over the past several weeks. So if you were recently shopping for a fixed-rate mortgage just before the interest rate change, you might not see a notable jump from what was offered prior to the 25 basis-point increase.

For those in search of a variable-rate mortgage, your monthly payments will now be marginally higher than what they would’ve been if no interest rate increase came into effect. Since the central bank’s announcement, Canada’s five major banks raised their prime lending rate from 2.75 per cent to 2.95 per cent.

While Bank of Canada’s hike will lead to an incremental rise in mortgage payments for a segment of buyers, historically, rates are still at record lows for both fixed and variable-rate mortgages. Coupled with the recent increase in the supply of homes on the market and month-to-month fluctuations in property prices, in many respects, market conditions have tilted in favour of buyers. That’s a considerable shift from what has occurred over the past half decade in Toronto.

On The Housing Market:

Since 2012, the average price of all home types in the Greater Toronto Area has skyrocketed roughly 72 per cent. Rock-bottom borrowing costs have played a large role in that double-digit climb, along with other market forces such as solid immigration and job growth numbers in Ontario.

So how will the housing market respond to the interest rate change?

  • Home Sales

The blip in sales activity seen in May and June will likely persist in July and perhaps spill over to the month of August.

After digging up data from the Multiple Listings Service (MLS), TheRedPin found home sales in the GTA from July 1st to July 20th dropped around 35 per cent from the same time last month.

  • Home Prices

On the pricing front, figures are far harder to predict. However, year-over-year single-digit increases can be expected to continue while month-to-month numbers may hover in the negatives.

TheRedPin did discover the total number of GTA homes that sold for at least 10 per cent over their asking price fell 67 per cent from July 1st to July 20th compared to a month earlier. Over asking sales are often an indicator of a seller’s market and pervasive bidding wars.

  • A shift to a pro-buyer environment

Up until March of this year, when home prices surged 33.3 per cent, first-time buyers looking to take the leap into homeownership faced significant hurdles – from record-low supply to frenzied bidding wars.

The recent implementation of the Fair Housing Plan together with the interest rate change will likely result in more of a pro-buyer environment in the real estate market, which many industry insiders suggest buyers should capitalize on.

  • Silver lining for homeowners

For most people, the decision to buy, live and invest in a home isn’t about short-term gains. While house flippers may be sensitive to month-to-month changes, when it comes to your property, having a timeline factoring in at least the next three to five years (both from a lifestyle and financial perspective) is often recommended. And to that point, price growth is still in the positives in comparison to the previous year. Moreover, as highlighted above, GTA-wide home prices collectively climbed 72 per cent since 2012 alone.

It’s also important to factor in how your individual property is performing rather than looking at the market as a whole. For example, when grouping together all home types across the GTA, the average sold price in June 2017 was recorded at a six per cent annual increase. However, when isolating just condominiums in Toronto, apartments saw a significant 23 per cent jump.

Location and home type are incredibly important when tracking the state of your real estate investment. Note: share your property type and neighbourhood in the comments section below and TheRedPin will provide information on average prices in your local market.

Lastly, it’s worth highlighting that in Vancouver, home prices have experienced positive growth after the region initially saw a correction in August 2016 when the BC government implemented its own 15 per cent foreign buyer tax. While Toronto home buyers are currently on the sidelines, many will re-enter the market after the psychological impacts of the Fair Housing Plan and interest rate change wear off.

Comments

  1. Brian

    I would like to know what is my home worth or what are average prices in my neighbourhood?
    Semi-Detached,(open concept)
    Ravine lot,
    1600 sq ft approx,
    No walkout basement but
    Finished professionally full basement.
    Walking distance to the Trinity Common Mall-
    Brampton(Dixie/Bovaird)
    Very close to the 410, schools, places of worship
    SS Appliances
    Laminate in rooms
    Hardwood on stairs & sitting area
    Iron spindles on stairs
    Entertainers Deck in backyard
    Gas bbq

    1. Author
      TheRedPin

      Hi Brian,

      Thanks for reaching out to TheRedPin!

      Given you’ve asked for a home evaluation, we’re going to have one of TheRedPin’s salaried agents personally follow up with some numbers.

      In the meantime, here’s the average price of semi-detached homes registered on MLS to be between 1,500 to 2,000 square feet in your Brampton neighbourhood of Sandringham-Wllington$652,200.

      Expect an email in your inbox soon with more in-depth numbers.

      Best,

      TheRedPin

      *Figures are for June 1 to July 22, 2017

    1. Author
      TheRedPin

      Hi John,

      Not necessarily an ad, but just a look into the market. If you’d like stats on a certain neighbourhood in Toronto or the GTA, just let us know and we can share figures with you too.

      Have a great Friday!

      Best,

      TheRedPin

  2. Dave

    Hi I was wondering if you think Condo prices in Toronto will drop in the next 12 months or will it be a slow steady climb? Thanks

    1. Author
      TheRedPin

      Hi Dave,

      What the last three months of real estate statistics have proven is that the Toronto condo market remains buoyant even amid the short-term slowdown seen in freeholds.

      In the second quarter of 2017 (April to June), a period in which the government introduced 16 new regulations including a foreign buyer tax and new leasing rules, condo prices climbed a whopping 28.1 per cent year-over-year.

      Even when considering month-to-month changes, condo prices have performed well. Between March to June of 2017, average condo prices in Toronto experienced 0.4 per cent growth. While modest, it’s considerable when factoring in that freehold detached houses saw an 11 per cent price dip during the same time period.

      The new-construction condo market has also remained strong, as the Building Industry and Land Development Association (BILD) reported sales of new-high-rise apartments climbed 89 per cent in June 2017 when compared to the same time last year.

      That being said, the recent increase in interest rates and the substantial sales drops in the resale market are considerable and may have a short-term impact on condo prices in Q3 2017 that have yet to be felt. Overall, pinpointing figures for the next 12 months is difficult, but the condo market has performed well on the pricing front so far and many industry professionals believe prices are on track to remain positive for the market as a whole.

      If you’d like to chat more about the condo market, please contact us at inquiry@theredpin.com or call 647-827-1075.

      Best,

      TheRedPin

  3. Chris

    condo by lake in Whitby. 2 bed 2 bath facing south towards the harbour and lake 1100 sq ft upper floor
    cp

    1. Author
      TheRedPin

      Hi Chris,

      Thank you for reaching out to TheRedPin!

      Between June 1 to July 22, the average price of 2 bed, 2 bath condos between 1,000 to 1,199 square feet along Whitby’s waterfront was $574,000. Collectively, this figure covers the average for three neighbourhooods – Downtown Whitby, Port Whitby and Whitby Industrial.

      If you’d like an in-depth condo evaluation, please send over all your property’s details to inquiry@theredpin.com or call 647-827-1075.

      Thanks,

      TheRedPin

  4. Victoria

    Hello,
    I’d like an evaluation of a 1bd 1 bath condo 615 sqft at Bay and College with no parking. It’s west facing and on the 45th floor.
    Thanks!
    Victoria

    1. Author
      TheRedPin

      Hi Victoria,

      We can definitely help gather those figures for you.

      Based on sales between June 1st to July 22nd, 1 bed, 1 bath condos between 600 to 700 square feet with no parking in the Bay Street Corridor neighbourhood sold for an average of $449,999.

      Please note Victoria, this is a broad neighbourhood analysis and the figure doesn’t factor in qualities such as your floor or view.

      Best,

      TheRedPin

  5. Jean

    semi Deachted in East York on Greenwood and Mortimer with 2 bed rooms + 1 bed room in the basement, Partial Finished Basement, No Parking

    1. Author
      TheRedPin

      Hi Jean,

      After looking at sales of semi-detached homes in your neighbourhood of Danforth Village East-York, as well as nearby East York, we found the median price of a 2+1 semi-detached home to be $790,000.

      This is intended to be a broad neighbourhood analysis and doesn’t factor in specifics such as the number of bathrooms or your partially finished basement.

      We’d be happy to offer you a more in-depth price evaluation. Just reach out to us at inquiry@theredpin.com or call 647-827-1075.

      Best,

      TheRedPin

  6. Cherish C

    Do you know the average time from interim occupancy to final closing for Pemberton Condo? Do all units have the same closing date? Is there a chance to close on the same day or within 2 weeks?

    1. Author
      TheRedPin

      Hi Cherish,

      We’ve answered your questions in three separate parts below:

      1.) Pinning down the average interim occupancy period for a specific builder is tough, as it can vary from building-to-building rather than by developer. Generally speaking, interim occupancy can last between three to eight months but can go for longer in certain cases.

      2.) “Do all units have the same closing date?” – In regards to your question here, it’s important to clarify what you mean by closing date. Technically, closing date refers to when a building is registered with the Land Registry Office. In this case, yes, all units in a building have the same closing date. However, if you mean “do all units have the same occupancy date” the answer is no. Since units on lower floors are completed before higher-floor units, owners on lower floors can move into (or rent) their condo earlier.

      3.) Technically yes, there is a chance to move in on the same day or within two weeks of when a building is officially registered. However, in reality, it’s difficult to time as most units in a pre-construction development are purchased either before or in the middle of its construction. If you were going to purchase within just two weeks of the closing date, you would be buying in the very late stage of its sales cycle when the building is nearly completed and likely almost fully sold out.

      If you’d like to learn more, please read our post on interim occupancy here or reach out to us at inquiry@theredpin.com or call 647-827-1075.

      Best,

      TheRedPin

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