Will Interest Rate Hike Cause Vancouver Home Price Correction?

The Bank of Canada’s recent announcement of a 0.25 overnight rate increase, and the Big Banks’ subsequent prime-rate hikes, will have some effect on Vancouver real estate activity, and there are various opinions on what that effect may be.

Vancouver Real Estate News

According to REW News, the outlook is quite positive.

Speaking on the latest Real Estate Therapist show on Roundhouse Radio 98.3FM, local agent Keith Roy tackled a listener question that asked, “Do you think the Bank of Canada’s interest rate hike will cause a correction in Vancouver real estate prices?”

Roy responded with a laugh, “No. Good talk.”

He added, “This is not the end of cheap money. This is a slight adjustment of cheap money.”

Roy explained that there could be a small, immediate effect on the market, but in the opposite direction than people might expect.

“People who have a rate hold in place will be incentivized to make a purchase before their rate goes up. So what you’re going to see is a run on [entry-level] activity in the next 60 to 90 days.”

Roy observed that the interest rate increase will not affect home owners or home buyers at the high-priced end of the market. “Interest rate rises Buyers of [multimillion-dollar] homes are getting a low rate no matter what. You’ve got a good relationship with your bank, you’re probably trading another large home you’ve got some cash, it’s not your only asset.”

Is this a sign of further interest rate rises in future? “Maybe. We’ll see if the Canadian economy can hold onto this — there were mixed reviews about whether we were ready for a rise.”

He said that he thought that the overnight rate would have to increase by a much steeper amount to cause a significant correction in Vancouver real estate prices, and that any correction would also be caused by a rising Canadian dollar, making local housing less cheap for overseas investors. “But we’re still at under 1% — that rate has got to be pushing up to four or five before we see a significant correction.”

However CBC Vancouver presents a different opinion:

“The biggest impact is people deciding not to get into the owner market,” said Tom Davidoff, a professor with UBC’s Sauder School of Business, speaking with guest host Gloria Macarenko during On the Coast.

“People will say, ‘I pay less in rent than I would even in interest’ … They’re going to say ‘Forget it, I’m going to keep renting.’ “

Davidoff added people may also decide to capitalize on the high interest rate, sell their property, and transition to renting.

He said when people shift from owner units to rental units, it puts an upward pressure on rental prices. A big part of why housing prices have been so high, relative to rental prices, is due to low interest rates, he said.

Despite the rate hike, Davidoff said it’s not all bad news.

“The good news is, I think the bank is going to take it slow and steady,” he said.

Davidoff said the reason the bank is increasing interest rates is to combat inflation. He said a significant part of why the national economy is doing well is the strong housing markets in Vancouver and Ontario.

“Should those markets start to sputter, I think that takes away a lot of the reason for future rate hikes,” added Davidoff.

Thus, a rate-driven crash in housing markets, while conceivable, is not a likely scenario.”

Sources:

www.rew.ca

http://www.cbc.ca/news/canada/british-columbia

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