SilverBeam Homes Blog

Rate Hikes and the Housing Market

by Bevony on 8 July 2022 Comments Off on Rate Hikes and the Housing Market
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It was the intention of the Bank of Canada to do a rate hike that would cool the housing market. While also curbing inflation. We are starting to see that these high interests are subduing some sales activity. But the pain for homebuyers is now starting, as well as for homeowners too. 

Interest rates are climbing, and inflation rates are climbing as well. Homebuyers are left to carry heavier financial burdens if they decide to go ahead with their goals of owning a home. Especially affected are first-time home buyers, since they are just entering the market with no equity coming in. 

The Double-Whammy Effect 

The situation is discouraging for many homebuyers. The interest rates are increasing, but the prices for homes are still high. This means down payments and mortgage payments are going to be higher. 

Many expected the higher interest rate to affect home sales. But even though there is a slight shift to more balanced conditions, sales are still at record levels and prices are above the 2022 expectations. 

Vulnerabilities for Homeowners

Some strategists expect to see a 0.75% increase in the policy rate by the Bank of Canada. But they are also not discounting the fact that there could still be a full-point hike. The most vulnerable Canadians are those with a Home Equity line of credit or HELOC. 

Many HELOCs have variable-rate interest rates, and so when interest rates rise, buyers may find themselves with higher payments out of nowhere. In these cases, the principal is sensitive to the rate hike. This is because a bank’s interest rate on HELOcs is tied to their prime lending rate. 

Even if the lender offers a specified period where they offer a fixed-term home equity loan. This is true regardless of the increase or decrease on the principal. 

New Stipulations 

In late 2023, it is expected that the Office of the Superintendent of Financial Institutions (OSFI) will need borrowers to pay principal and interest when they have a combined loan that is above 65% of the value of the home. 

Dividend Machine 

The real estate sector has been underperforming on the stock market with a 22.67% year to date. It is actually the 3rd worst performing sector, coming in after healthcare and technology. However, we are still seeing a popularity in income investigation, especially for choice properties. 

The 5.27% dividend is at $14.09 per share, and there has been the return to profitability of the $4.62 billion REIT in Q! Of 2022, thanks to positive leasing momentum and rent collections. The net income for the quarter was almost at $387 million, compared to a net loss of $62.2 million in Q1 of 2021. 

The core assets for this REIT are industrial and retail properties, but we see that the residential platform is seeing some amount of growth. Core assets and the development pipeline are or should be focused in the near term. 

Rate Hikes Have Consequences

The rules are being tightened by the OSFI. Some mortgage products are seeing this tightening to ensure that homeowners do not end up drowning in a debt that continues to place them into deeper debt. If we are to see a supersized rate hike soon, this could completely freeze the housing market and cause a decline in the value of homes on the market. 

BevonyRate Hikes and the Housing Market