07 Apr How high can housing prices go?
Interest rates and real estate go together like mashed potatoes and gravy. As a long-time barometer of housing prices, interest rates are a key indicator of determining whether housing prices will go up or down.
Simply put, if rates go down, the cost to borrow money in the form of a mortgage goes down, which increases the amount of people wanting to buy real estate—and demand. When rates go up, the opposite is true.
The Bank of Canada (BoC) will begin with an initial 25bp increase in policy rates in March, from 0.25% currently, with projected further hikes to end 2022 at 1.25% and 2023 at 1.75%. So, what does this actually mean? If the BoC increases or decreases its overnight interest rate, it does not necessarily mean the banks, where you and I go to get a mortgage, will follow suit. Remember, banks are businesses and they will compete for our business by offering the best rate they can.
According to Matthew O’Neil of Connolly Capital Mortgage Solutions, one of Canada’s top mortgage brokerages, as of writing this, a 5-year fixed comes in at 3.49% and a variable rate Prime of 0.80%, which equals a rate of 1.90%.
“The bottom line is the cost to borrow money is still historically low,” says O’Neil. “Which should continue to fuel buyer demand for the remainder of 2022.” Insert interest rate graph
Other key barometers to watch as they relate to housing prices are trends in immigration and population. According to StatsCan, Ontario’s population is projected to reach between 14,848,500 (scenario L) and 18,256,100 (scenario H) by 2038, that’s an increase from 13,538,000 in 2013.[1]
The three primary areas of residence for immigrants would remain Toronto (between 33.6% and 39.1%), Montréal (between 13.9% and 14.6%) and Vancouver (between 12.4% and 13.1%).[2] Population growth is good. As a country, we need it. But we have a problem. There are not enough homes for everyone to live in. Among the G7, Canada has the lowest average housing supply per capita, with 424 units per 1,000 people.[3]
At the rate we’re going, Canada, overall, would need 1.8 million more dwellings to have the same number of homes per capita as the rest of the G7.[4] Unless you believe in miracles, the housing shortage we are currently experiencing won’t be fixed anytime soon. Government bureaucracy at the provincial and municipal level combined with rising material and land costs don’t make it easy for developers to build.
Historically, we could watch what interest rates do to predict housing prices. In the past it was the key indicator to watch. Today, with what appears to be a prolonged historically low interest rate environment, the key barometers will be immigration, population growth and the scarce housing supply. If this continues, how high will housing prices go?
[1] StatsCan – Results at the provincial and territorial levels, 2013 to 2038
[2] StatsCan
[3] Financial Post
[4] Financial Post