'It comes down to price, or patience' as latest interest rate hike puts pressure on homebuyers

Richard Humphreys, a marketing executive, has been searching for a home to buy around Mississauga, Ont. for four years. He’s made around 10 bids, all of which have failed.

“I want to own a property. And I will probably continue to rent until I have a better idea of what's going on as everything just seems so wonky nowadays.”

The Canadian housing market has been a whirlwind this year, and is finally seeing signs of cooling thanks to the Bank of Canada’s consistent interest rate hikes. With the Bank announcing another .50 interest rate increase — bringing the rate to 4.25% — the housing market will continue on its wild ride well into the new year.

“We know that when interest rates rise, housing is the first area of the economy to respond,” says James Orlando, director at TD Economics.

“We've seen the drop in sales, we've seen the decline in prices, it's been swift.”

The cooling housing market is sweet relief for buyers. But even as the Bank of Canada makes drastic moves to reduce inflation, it doesn’t mean that buyers are suddenly able to snap up their dream homes.

Fixed and variable-rates both affected

According to a recent National Bank of Canada report, it now takes 67.3% of a household income to pay a mortgage on the average home — the highest percentage in 41 years.

“It’s definitely slowed things,” says Jeneen Marchant, a realtor with RE/MAX Real Estate in Edmonton. “And with each increase, you could see it slow a bit more and a bit more.”

Despite the rising interest rates, Marchant notes that these rates are, in fact, a return to what normal interest rates are.

Historical data indicates that the low rates we saw between 2020 and spring 2022 were a short lived phenomena, and that the current rates are more typical. In fact, a 5-year conventional mortgage didn’t dip below 6% between January 1975 and February 2004.

“Not everyone has been impacted by these interest rates just yet,” says Orlando. He notes that those who have a variable-rate mortgage are particularly vulnerable to feeling the effects in the near future.

Orlando says that not everyone's seen their monthly payments increase, but they've seen the amount of money they pay to interest increase. Because of this, he notes there will be more adjustment in the housing market, “even if the Bank of Canada is approaching the end of its rate hiking cycle.”

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Market correction will take time

If you’re waiting for interest rates to lower in the near future to buy a home, this might not be the best idea. Marchant points out that while mortgage rates may appear scary now, the housing market typically moves in five to seven year cycles.

“Buyers still have to buy, and they have to just realize that the interest rates are normal now.”

“Now that the interest rates are going up, [home prices] are going down slightly, but not really as fast as I thought they would be,” says Humphreys. “We’re kind of just stuck in limbo.”

Humphreys recognizes that high interest rates make for higher mortgage payments. He notes that if he had gotten into the housing market 10 or 15 years ago, he would have been able to do so on his own financial terms.

But the cost of homes in the Greater Toronto Area and the increased demand for housing has made his hopes of buying a home — without relying on outside help — nearly impossible.

While Humphreys is able to put down a sizable downpayment for a home purchase, he’s having to rely on parental support in order to bridge the financial gap.

“I never wanted to use that money. I never wanted to reach into that bank.”

Shifting expectations

Marchant emphasizes the need to shift your expectations from the past few years when you look for a new home.

During the early days of COVID-19, first time homebuyers were able to skip the step of purchasing a condo or a townhome, instead moving straight into detached residences.

That’s no longer the case.

With interest rates rising, Marchant suggests that a first-time buyer think about buying their first property as a way to build equity.

Marchant observes that prices may not come down, and interest rates might keep rising. This means that it will be even harder to buy a home than before. If interest rates do drop, but prices rise, then an equilibrium will be created, making the housing market similar to what it was in the early 2010s.

Marchant has had many clients move to cities such as Edmonton, where they have been able to get much more value for their dollar.

She observes that in some markets, the housing prices jumped by 50% or more in a matter of years. She has seen instances where individuals sold their properties, and were able to move to Edmonton and purchase a house for cash.

“They came here with no job, but at least they had a house to live in, and a little bit of savings while they're getting on their feet,” she says. “It just shows how the affordability in other provinces was so difficult that people had to sell their homes to move here to basically start a different life.”

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Long-term hope

If you educate yourself about what’s happening in the market, and keep your expectations in check, you can make informed decisions about buying a home.

And if you’re in the market to sell a home, Marchant’s motto of late has been “it comes down to price or patience or both.” While you won’t be able to necessarily get the price you want for your home, and it may take longer to sell, there are still buyers out there.

Orlando echoes this sentiment. He points to Canada’s continued high demand for housing, a highly educated workforce, and continued high immigration that brings in skilled labour, coupled with the fact that housing is undersupplied.

“The long-term fundamentals for housing are very clearly that we're going through a difficult time again,” he observes, “but it looks like the other side of it's going to be pretty bright.”