Recent interest rate hike likely to cool Edmonton home markets

Prices are expected to accelerate as sales slow, says Phil Soper of Royal LePage in Canada.

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Another rate hike and another expected dip in reselling activity is expected to head into Edmonton’s busiest fall market.

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The Bank of Canada raised its overnight interest rate by 75 basis points this month, which is expected to weaken sales activity further.

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“If you’re shopping for a home…that increase will make things more expensive,” says Phil Sober, president and CEO of Royal LePage Canada.

Activity has already fallen significantly from record highs in March after the central bank began raising interest rates to slow rising inflation.

However, the effect of the recent rally is likely to have a “neutral effect on current activity,” Sober argues, because many buyers have preapproved of interest rate suspensions.

He adds that price increases in general are not the “end of times” for the real estate market. Rather, they restored historical life to normal.

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“So the drop in sales we saw from June to mid-August was a return to seasonality that we haven’t seen since the start of the pandemic.”

In August, buyers bought 1,809 homes in the greater Edmonton area, down from 2,055 in the same month last year and in 2020 when 1,874 homes were sold.

Suber notes that both were extraordinarily active.

Before the pandemic, there were 1,566 sales in 2019, and 1,678 in 2018 for August.

While last month’s activity was in line with historical trends, it was still a sharp drop from March when 3,283 trades were recorded.

Average prices have also decreased from March when the median price reached $415,000. In August, that number was $377,000.

“The housing market has slowed significantly, but to what extent is it driven by the perception among borrowers that ‘rates are going up, so I will wait and see what happens? ‘” says Edmonton mortgage broker Mark Crossman, managing partner with Alberta Mortgage Professionals.

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However, it is unlikely that borrowing will become less expensive than it is today. He points out that the prime rate is now 5.45 percent, which many variable rate mortgages are discounted from. The rate was 2.7 percent in March.

In contrast, the effect of the increases was more profound on variable mortgages than on fixed rate mortgages, whose rates are determined by bond market returns that anticipate central bank hikes.

This has resulted in a significant difference in cost over the past few months.

Crosman notes that a $400,000 home with a 5 percent down payment and a five-year fixed mortgage of 3.39 percent would have received a monthly payment of $1,950 in March. Today, the flat rate is 4.54 percent with a monthly payment of $2,196 — a difference of $246.

With a variable, interest rates are much higher today at 4.55 percent from 1.55 percent in March, resulting in a monthly payment of $2,208 versus $1,590. That’s a difference of $618.

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“The amount you can qualify to borrow has also changed,” Crossman says, referring to the federal stress test that ensures borrowers absorb future increases.

“Before the hikes, the qualifying rate was often 5.25 percent.”

Today, most borrowers must qualify at their current rate plus two percentage points, which is higher than the Bank of Canada’s standard five-year mortgage, at a fixed interest rate of 5.25 percent.

Borrowing costs are expected to increase further this fall, albeit to a lesser degree with the other Bank of Canada forecasting an overnight rate increase of 25 basis points.

Super says that for many, index rates may stabilize soon.

“It probably won’t be enough to start prices going up again, but it will probably keep prices moving towards the water.”

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