This is a question I've been hearing a lot lately. Buyers who have been reading the latest news on interest rates, are wondering what the impact will be on the property purchases they are contemplating. Should they still buy? Won't their mortgage cost more? Won't it make prices fall, if interest rates go up?
Here is my thinking on this topic, based on having purchased houses in interest rate scenarios ranging from less than 2% to over 17%. Over time, houses always go up in value, unless there is something wrong with the house. Over my 40+ years of home buying, I haven't seen a market crash here in the GTA. Sure, sometimes prices will stall, or a house on a certain street will sell for less than one that looks exactly the same on the outside. That's because this isn't retail, and we aren't shoe shopping. There are many more factors at work. Here are just a few:
Buyer access to capital: if the buyer has a lot of ready cash and doesn't need much (or any) mortgage, they may offer more than someone who is constrained by the maximum financing they are able to get. They'll have an advantage when interest rates are high, even if the sold prices are a bit higher.
Seller motivation: we don't necessarily know why the seller is selling. Occasionally we have clues, like when the property is an estate sale (someone who owned the property has died), or a power of sale (usually a lender has called their debt or mortgage because they haven't made their payments). But other reasons, like the seller has been transferred and must move, or they won the lottery, or they're getting a divorce - we may not get to know those things. Their agent doesn't have to share the seller's motivation with the buyer's agent.
Neighbourhood changes: perhaps a big factory is going in on the next street, or a condo that will overshadow the back yard. That might make the house sell for less than when the plans for that weren't known to those in the area. On the other hand, the construction of a beautiful new community centre or school might push prices higher than they had typically been for that location.
Other factors - like a pandemic: a couple of summers ago, when the word pandemic was an unfamiliar novelty, there was what has now been called an "urban exodus". People were selling condos like hotcakes, in favour of buying homes in the suburbs with outdoor space. Now many companies have decided they want to see their people all in one big room again. (We won't get into office culture and command-and-control management just now). This means the harsh commute to downtown locations has become slower and more frequent again. Many people are rethinking their plans, and condo prices are continuing to escalate.
Seller expectations: no one wants to feel like they got the bad end of a deal. So when a seller's neighbour realized a million bucks (or more) just a few months ago, no matter what evidence tells them otherwise, they want a million as well. Or more. Their agent can show them that now the most recent properties have sold for less. They may decide to keep waiting. Their logic says if they just wait long enough, the right offer will come. They might not understand that waiting a few extra days probably makes little difference - but that waiting for a month or two might make their property look stale. Recently I helped a client find a beautiful condo that had been listed since January. The owner was holding out for just the right price, it seems. Or the right person. We did our due diligence and the property was good. The fit was right. The price was agreed. And everything turned out.
So to answer those questions at the beginning, will interest rates make prices fall? The average price is certainly cooling. But that may mean buyers aren't overbidding by as much. It might mean sellers are tempering their expectations. It could mean that the size and type of properties that are hot right now is different than a month or two ago. I'd prefer you look at it this way - prices may simply be rising more slowly, and the market is going through a period of adjustment. If you buy a property today, in 5 or 10 years, the odds are very much in your favour that it will be worth more than you paid for it. And will your mortgage rate mean higher payments? Yes, possibly for now. However rate is not the only thing to consider - and if you have a great mortgage agent on your side, they can help you find a mortgage with enough flexibility that if rates fall again, you can make a switch without undue penalties.
All in all, this means my advice is the same as it has ever been. The best time to buy a home was a decade or more ago. The second best time? It's now. If you're thinking of selling or buying a property, or both, reach out today and let's talk.