Forecasting rate increase impact

by Justin da Rosa14 Jul 2017

There will be a rush of buyers over the next few weeks as lenders hold older, lower rates, according to one real estate veteran. But what will happen after those rates expire?

“I can only approach this from a historical perspective: I’ve been in this business for 38 years and I’ve been through a few economic cycles over the years,” Elton Ash, regional EVP, RE/MAX of Western Canada, told REP. “Historically, what occurs is that the real estate market actually goes through a surge at that point. People sitting on the fence decide to jump in and finalize a purchase.

“They’ve been pre-approved and the banks will likely hold the rate for up to 60 days. We will see a surge in home sales, no question of that.”

Those rate holds won’t last forever, though.

When they do expire, Ash argues the slight uptick in mortgage costs will be negligible for most buyers.

That’s a stance held by many industry players.

“Fixed mortgages will stay the same until it’s time to renew, and most lenders have already caught up with the increase. For variable-rate mortgages, the increase will equate to roughly $12.50 for every $100,000 borrowed, meaning a $300,000 mortgage would only increase by about $37 a month,” Jeremy Amyotte, an agent with the Jeremy Amyotte Real Estate Team, said.

The Central Bank raised its new target for the overnight rate to 0.75% Wednesday, citing a confident financial outlook and above-potential growth.

This despite softened inflation, which the bank judges to be temporary.

“Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy,” the Bank said. “Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.”

Following the announcement, three of the country’s largest banks announced increases to their variable rates.

Other lenders are expected to follow suit.

However, even with the rate increase, lenders will still offer historically low rates.

“The increased benchmark interest rate of 0.25 per cent should not have an adverse effect on the housing market, as we are still in a very inexpensive lending period,” Zoocasa CEO Lauren Haw, said. “Mortgage rates remain at historical lows since the decrease seen after the 2008-2009 recession and it will take a series of increased rate hikes before we see a significant impact on homebuyers in Canada.”

Related stories:
BoC interest rate revealed
Report suggests Canadians optimistic about housing


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