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Vancouver Real Estate is Not Immune from the Effects of Rising Interest Rates

Vancouver Real Estate is Not Immune from the Effects of Rising Interest Rates
3 min. read

A recent increase in interest rates by the Bank of Canada may not bode well for the Vancouver real estate market, especially for those who want to enter the market for the first time. Experts say that the increase may hit first-time homebuyers even harder than those wishing to move house.

The rise was not unexpected

The Bank of Canada has raised interest rates by 1.75%, which came as no surprise according to Sal Guatieri, senior economist at BMO Capital Markets. He described the rise as “much anticipated” by experts. In fact, this is the fifth time the Bank of Canada has raised its interest rate by a quarter point since last summer. The current Bank of Canada interest rate is the highest it’s been since December 2008.

After the interest rate increase was announced, Royal Bank of Canada, Bank of Montreal, TD, CIBC and other banks raised their rates to 3.95%. Scotiabank is expected to raise their prime rates as well. Analysts also predict that the rates are likely to go up three more times before 2019 is out, for a total increase of 2.9%. And another increase in 2020 is not out of the question.

Homeowners may face raising mortgage debt

The Vancouver real estate market was already inflated and homeowners will have to keep a close eye on raising mortgage debt due to the high cost of home prices. In fact, some experts believe that the rise in mortgage rates could force some homeowners to sell their homes.

Homeowners are also dealing with the two- and three-year fixed-rate mortgages they took out a few years ago when interest rates were very low. As time comes to refinance them, those homeowners may end up paying considerably higher interest rates than when they initially took out the loans.

First-time homebuyers may find it more difficult to enter the market

Given the adverse combination of factors such as Vancouver’s soaring housing prices and higher interest rates, plus the immoderate relationship they have with median family incomes there, it may be harder than ever for first-time home buyers to get into the market. The average property in Vancouver costs more than 12 times the average annual family income.

There is a potential upside for first-time home buyers, however, as lenders may offer special incentives. When home sales are down, there tends to be more competition for each loan. Lending institutions often have to be willing to take less profit just to get the business in the first place – and this can lead to better lending terms for first-time home buyers.

If home supply in Vancouver keeps increasing, buyers could have more available inventory as well, making the decision of whether or not to take the plunge all the more difficult.

The interest rate increase could cost homeowners $2,500 a year

Environics Analytics has compiled an exhaustive analysis of available data to find that the average Canadian household pays around $680 more in interest per year due to last year’s cumulated interest rate increases.

By adding the latest hikes from 2018, the average net increase is closer to $1,715. Environics Analytics says that the numbers get even bleaker when the long-term consequences on fixed-rate debt become clear, which they believe will cost the average Canadian homeowner approximately $2,500 per year.

Private lenders expect to see more business

Sandy Oh, the president of Tri City Group of Companies in Vancouver, says that his clients are not likely to go along with additional fees in the tens of thousands of dollars caused by the increase in interest rates. He expects homeowners in the Lower Mainland to be much less affected since many of them bought their homes decades ago and likely have small mortgages. Oh believes that first-time buyers and those renewing adjustable rate mortgages have the most to lose.

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