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Latest rate of interest hike more likely to cool Edmonton’s properties markets

By Mike D. Wagner

  1. homes

Prices expected to ‘tread water’ with the slow down in sales, says Phil Soper of Royal LePage in Canada.

Borrowing costs are expected to increase more this fall, though to a lesser degree with another Bank of Canada forecast to increase the overnight rate 25 basis points. Borrowing costs are expected to increase more this fall, though to a lesser degree with another Bank of Canada forecast to increase the overnight rate 25 basis points. Photo by Chris Wattie /Reuters

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Another interest rate hike and another expected dip in resales activity is expected heading into Edmonton’s typically busier fall market.

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The Bank of Canada raised its overnight rate 75 basis points this month, which is expected to dampen sales activity further.

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“If you’re shopping for a home … you get this increase is going to make things more expensive,” says Phil Soper, president and chief executive officer of Royal LePage in Canada.

Already activity has fallen substantially from record heights in March after the central bank began hiking rates to slow high inflation.

Still, the effect of the recent hike will likely have a “neutral effect on current activity,” Soper argues, because many buyers already have been pre-approved with holds on interest rates.

Overall, the rate increases are not “end of times” for the real estate market, he adds. Rather they have restored historical normalcy.

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“So the dip in sales we saw from June to mid-August as a return to seasonality not seen since the start of the pandemic.”

In August, buyers purchased 1,809 homes in the Greater Edmonton Area, down from 2,055 in the same month last year and in 2020 when 1,874 homes sold.

Both were unusually active months, soper notes.

Prior to the pandemic, 1,566 sales occurred in 2019, and 1,678 in 2018 for August.

While last month’s activity was in line with historical trends, it remains a strong drop from March when a record 3,283 transactions took place.

Average prices have also come down from March when the average price reached $415,000. In August, that figure was $377,000.

“The housing market has slowed significantly, but how much is driven by perception among borrowers that ‘rates are rising, so I am going to hold off and see what happens?’ ” says Edmonton mortgage broker Marc Crossman, managing partner with Alberta Mortgage Professionals.

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That said, borrowing is unlikely to get less costly than it is today. He points to the prime rate now at 5.45 per cent, off which many variable-rate mortgages are discounted. The rate was 2.7 per cent in March.

In turn, the impact of hikes has been more profound on variable mortgages than fixed-rate mortgages, whose rates are determined by bond market yields that anticipate central bank hikes.

This has led to a significant difference in cost over the past few months.

Crossman notes a $400,000 home with a five per cent down payment, and a 3.39 per cent five-year fixed mortgage, would have had a monthly payment of $1,950 in March. Today, the fixed rate is 4.54 per cent with a monthly payment of $2,196 — a $246 difference.

With a variable, however, the interest rates are much higher today at 4.55 per cent than 1.55 per cent in March, resulting in monthly payment of $2,208 versus $1,590. That’s a $618 difference.

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“The amount you can qualify to borrow also has changed,” Crossman says, referring to the federal stress test ensuring borrowers can absorb future increases.

“Before the hikes, the qualifying rate was often 5.25 per cent.”

Today, most borrowers must qualify at their current rate plus two percentage points, which is higher than the Bank of Canada’s five-year, fixed-rate benchmark mortgage at 5.25 per cent.

Borrowing costs are expected to increase more this fall, though to a lesser degree with another Bank of Canada forecast to increase the overnight rate 25 basis points.

To many, it’s an indication rates may plateau soon, Soper says.

“That is likely not enough to start prices rising again, but it will probably keep prices treading water.”

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Mike D. Wagner 1140 posts 0 comments

Love to write so I write about Edmonton my beloved City!!! Studied at University of Alberta, I love this place. Ask me anything!

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