When rates go up, stuff blows up! Does the real estate market blow up when rates do? It really depends; it depends on supply, demand, the market trend, but mostly it depends on the strength or weakness of the drivers in the marketplace. The drivers are the return on investment, average rents, average income, availability of financing, gross domestic product, real estate values, and real estate affordability. Each of these drivers has made headlines over the last number of years in British Columbia. The combination of rate hikes and stress tests with a driver are certainly affecting the marketplace today.
Most of us would think that the effect of higher interest rates and the stress tests would be negative as higher rates expose people that are financially vulnerable, which is almost all of us. Households, corporations, governments, and we investors all feel the pain of higher interest rates. As rates move up the market feels the pain. Buyers can no longer afford the dream home that they wanted and the sellers no longer have the buyer that wanted to buy their dream home. The end result? A market that slows and prices that eventually come down.
Therefore, we can say that when rates go up, the market slows. Does the investor feel the same pain? Or, does the investor experience a better market for his or her investment portfolio? As rates move up the market does slow down. In turn, the market creates more tenants in the Fraser Valley and Greater Vancouver area, which helps the investor with his or her investment properties. So, where does the risk lie with higher interest rates? The risk lies where the investor is over-leveraged or cannot create positive cash flow. However, a prudent investor is actually in a better position. With more potential tenants and less supply of rental housing, the investor could benefit.
All of this being said, the investor must be cautious of higher interest rates hindering the economic activity in the marketplace. If the first-time buyer property is unattainable because of mortgage rules and higher interest rates, we may see a slow down in construction as well. The slow down of construction is great for controlling supply in the market, but is bad for well-paying jobs. Look around as you drive through Vancouver, Surrey, Abbotsford, and throughout BC, building and construction is everywhere and it is a major driver of our economy. Excavators and tools are being sold, houses are being framed, landscaping is being finished, and homes are being sold. A long list of individuals from labours, trades, sales, lawyers, retail stores, and of course, the government are making great financial gains from the real estate and construction boom. All of this could change for these individuals if the market slows down.
When rates go up, stuff does blow up. Higher interest rates and more challenging lending rules will result in 1) slower home sales, 2) more tenants, 3) higher rents, and 4) higher bank deposits as banks will be more eager to lend to quality borrowers. Investors, this is the time to prepare for the market slow down and create opportunities.
Finally, a speed bump has appeared in the Fraser Valley Market! I say finally because the investor finally has some inventory to choose from and has the ability to truly negotiate a deal, rather than paying the asking price or above. This is what the market really needed; a reality check. Time to get the greed out of the market. Let me remind you, that we are still in a fantastic market. Most areas and property types are still in seller’s market and will continue to be in a seller’s market. The market we have been experiencing for the past few years has been anything but normal. How quickly we reframe what normalcy is.
All property types are experiencing increased inventory and a decrease in sales volume bringing the STR numbers down throughout the Fraser Valley. This is causing a softening of the market. This is a good thing. Investors should be excited about what’s happening with better opportunities and more realistic sellers appearing in the next few months as we go through summer.
Condos continue to be the strongest part of the market. It’s all about affordability in the end. New mortgage rates, rules, and record high values are pushing this part of the market. However, townhomes are still rocking with strong numbers. And, don’t forget that the majority of the single family market is still in a strong balanced or seller’s market.
Call or email me if you are looking for some good opportunities to invest in or are just curious about the market or where to invest. Get out there and have some fun.
Personal Real Estate Corporation
604-807-4366 or firstname.lastname@example.org
STR (Sell Through Rate) Formula = Sales ÷ Active Listings + Failed Listings + Sales