Calgary’s real estate market, as with other major markets across the country, started to shift from booming to cooling when the Bank of Canada started to increase the interest rates back in March. So far, the effects of this corrective measure have been more pronounced in communities surrounding the city, like Canmore and Chestermere, which tend to be more sought-after by buyers and are dominated by the traditionally more expensive detached homes.
However, it is expected that the central bank will keep increasing the rates until 2023 in an attempt to keep inflation contained. This will press the prime rate even more, and will likely leave many potential buyers out of the market, at least for now. What movements can we expect from the Calgary real estate market in the near future? Let’s take a look at the facts.
What Do Higher Interest Rates Mean for Real Estate?
Simply put, higher interest rates mean a higher cost of borrowing money, including the mortgages that virtually all Calgarian buyers use to purchase real estate properties, either for housing or as an investment.
This has left many people out of the market during 2022 because their buying power has decreased: the monthly payments are set higher, and the stress test to qualify for a loan is more difficult to pass, as borrowers need to prove that they can pay their monthly payments at an interest rate at least 2% higher than the current market rate.
The interest rate hike will affect current mortgage borrowers too. In the case of variable rate mortgages that have fixed monthly payments, holders will see an increase in interest rather than in their principal payment amount, and the ones holding a fixed-rate mortgage, they’ll start to pay a higher monthly amount once they renew it. This situation will likely increase the risk of mortgage default.
More Pressure on Home Affordability
According to RE/MAX, we can expect a bigger price drop in residential housing during the fall. However, this won’t likely improve the affordability issue Canada is experiencing. As we discussed in our previous article, residential developments are stagnant since 2020, while the demand keeps growing. If we add to this equation the current economic conditions, the hiking interest rates, and the possibility of a recession upon us the market is living, we can expect even more pressure on home affordability, and more buyers being left out of the market.
When Can We Expect Interest Rates to Stop Rising?
In an economy marked by uncertainty, it’s impossible to say when the rate hike will be over, but everything indicates that we will see higher interest rates until early 2023 at least, and of course, inflation will be the leading indicator of when we can expect the increases to stop. Despite the never-ending cycle of ups and downs in the economy, the smartest thing for investors to do is to stay informed and work with real estate experts that can provide the best advice.
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