How interest rates affect buying and selling

How interest rates affect buying and selling

The Annapolis Valley real estate landscape is beginning to increase activity. As buyers and sellers prepare for the traditional spring influx of listings, one can hope that interest rates will begin to decline after an increase of rates over the last year or more.

The Bank of Canada's interest rate, also known as the “overnight rate”, has a significant influence on the Canadian housing market, affecting both home buying and selling:

When the Bank of Canada raises or lowers its key interest rate, it directly affects the interest rates that Canadian banks offer on mortgages. When interest rates are low, mortgage rates tend to be lower as well, making it cheaper for homebuyers to borrow money. This can stimulate home-buying activity.

Conversely, when interest rates are high, mortgage rates increase, making it more expensive to borrow money and potentially slowing down home-buying activity.

Lower interest rates generally make it easier for people to afford homes because their mortgage payments are lower. This can lead to increased demand for homes, which can drive up home prices.

Conversely, higher interest rates can make homes less affordable, potentially leading to a decrease in demand and a decrease in home prices.

As we have seen with recent increases in the “overnight rate”, changes in interest rates can also affect overall housing market activity. Lower interest rates can stimulate housing market activity by encouraging more people to buy homes, while higher interest rates can dampen housing market activity by making it more expensive to borrow money.

When looking at whether it is a seller's market vs. buyer's market, a low-interest-rate environment, where borrowing is cheaper, is often a seller's market because more buyers are looking to purchase homes. Conversely, in a high-interest-rate environment, it tends to be a buyer's market because there are fewer buyers able to afford homes.

Knowing that the Bank of Canada's interest rate has a significant influence on the Canadian housing market, affecting both home buying and selling activity, hope is that interest rates will begin to decline sooner than later.

This past May 2, Bank of Canada governor Tiff Macklem said before a Canadian Senate committee on banking, the economy, and commerce, that high interest rates have been more effective in Canada than in the United States, likely setting the stage for the two countries’ monetary policy to be much different in the coming months.

Macklem indicated that he and his team are growing more confident that inflation is on a sustainable path back to two percent.

Canadian economic growth has somewhat stalled, indicating that there is an excess supply of goods. Wage increases have stabilized and the labour market has cooled, which has helped to bring down prices, Macklem noted in his presentation to the Senate.

Noted by CBC, Macklem was happy with recent signs. "Our key indicators of inflation have all moved in the right direction.”

"We've come a long way in the fight against inflation, and recent progress is encouraging."

Canada's annual inflation rate was 2.9 per cent in March, below the U.S.'s 3.5 per cent.

Macklem has said that the Bank of Canada is seeing the right trends to begin lowering interest rates, but it wants to see those trends sustained for a longer period.

Macklem's upbeat tone could be good news for homeowners and would-be buyers who have been forced to buy or refinance a home with interest rates at 20-year highs.

The next opportunity for the central bank to cut rates comes on June 5. As a buyer or seller, this may be the time to start your search in the spring – a traditional time to sell homes.

Sources: Globe and Mail & CBC