Declining interest rates have been contributing to a rise in real estate prices across Canada. Today, the Bank of Canada (BoC) decided to raise interest rates, in an attempt to stop out of control real estate price growth in Toronto and Vancouver. This got me thinking, in the past when interest rates rose, how much did it actually impact real estate prices? Turns out, not as much as you would think.
The Mechanics of Interest Rates
Interest rates are directly tied to how much money people can borrow on their mortgage. Slashing interest rates generally allows for a 3% increase in borrowing power per 0.25% lowered. One of our other authors showed the direct correlation between the slash of interest rates and home prices up to 2015. The opposite is also true, where a 0.25% increase in rates correlates to a 3% decline in borrowing power. Not a lot has been written about the correlation of rising rates and home prices however, so we pulled some numbers to see what we could find.
Last Interest Rate Hike Was In June 2010
This isn’t the first time interest rates have been hiked, but it’s been a while. In June 2010 interest rates rose from 0.25% to 0.5%. One month later, it got another hike to 0.75%, before reaching 1% by September 2010. It stayed at that level for a few years, before getting a double rate cut back to 0.5%.
Source: Bank of Canada, Toronto Real Estate Board, and Real Estate Board of Greater Vancouver.
Toronto Prices Stalled For 7 Months
Rising rates had minimal impact on cooling home prices. In May 2010, the composite benchmark price was $405,800. The hike to 0.5% produced a 0.59% decline in Toronto home prices. 0.75% produced a 1.14% decline. The strange thing is, the next hike didn’t produce a decline – prices increased. After three rate hikes, prices recovered by January 2011 – when prices hit $407,700. So 3 rate hikes meant 7 months of stalling prices. Not exactly what I would have expected.
Vancouver Prices Stalled For 9 Months
Vancouver real estate saw a similar reaction to rate hikes. In May 2010, the benchmark price of composite homes was $578,500. After the same number of hikes, prices stopped dropping in November. By March 2011 the benchmark surpassed the May 2010 price, when it reached $586,100. A couple months longer than Toronto prices stalled for, but once again it’s not quite what I expected.
While slashing interest rates has a fairly clear cut relation to price increases, it appears rising rates don’t necessarily reverse that change. Every 0.25% increase in interest rates does reduce borrowing power by ~3%. Somehow Toronto and Vancouver buyers found the extra money.
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“Somehow Toronto and Vancouver buyers found the extra money.”
Was it Toronto and Vancouver buyers who found the money or was it foreign and/or foreign financed buyers?
Oh Snap. What an insightful comment!!
Agreed that there is definitely a foreign buyer effect at play. Perhaps go back a bit further in time?
Interest rates are just one piece. We had insatiable demand for our risk free insured mortgage debt from around the world, especially post-GFC where negative rates persist. Lenders will keep lending regardless of economic factors or how high home prices go thanks to this government protection (which is insane).
Then we have regulation limiting new home supply. With just a little common sense you can see that at the massive profits developers get from breaking land into serviceable units, that everyone would be doing this in a free market and we’d get too many lots. But that hasn’t happened.
Then we have a government who uses immigration as tool to not only bail out huge pension promises they have to their own employees, but as a tool to inflate housing demand to stimulate the economy. Meanwhile, kids who are born here have little hope in getting into a home with this trajectory.
Then we have low interest rates. In a climate where Canadians have become obsessed. And I mean obsessed to the point that it is almost nauseating. It’s a bubble here for sure. But the obsession and low rates combined means they are maxing out what they can afford based on income, and then lying a bit too for a down and about income sources. Lying pays big and there has been little oversight.
What do you note. All four factors are from government. Anyone arguing a free market here is lying (real estate agents). If you want affordable housing, like affordable food, water and other life necessities, than we need to vote out the BC, Ontario and Federal governments and elect a government based on removing these horrendous policies that have created the worst housing crisis in our history.
[…] that should be fueling business growth? Afterall, lowering interest rates raises price. However, raising rates has historically had a minimal impact on cooling home […]