It’s hard to believe how quickly this year has gone. It seems just yesterday that it was early January getting back into the swing of 2023, and now the snow is starting to melt as we approach April. Economically, it has been a topsy-turvy quarter, with interest rate hikes, confidence concerns in the banking world, and a very tight rental market. Here’s how it all affects your rental property.
Mortgage rate hikes
The one thing that has hit the most rental owners is the rise in mortgage rates. If you locked in long-term a year ago, you will likely sit comfortably. However, if your mortgage is up for renewal this year, the rate has probably gone up from as low as 1.9% to a renewal rate of anywhere from around five percent on a five-year term to around six percent for a shorter term. That means an increase of a few hundred dollars a month on your renewals.
The Bank of Canada, following the U.S. Federal Reserve and other financial institutions worldwide, has raised interest rates to try to combat inflation. Higher interest rates push consumers to save more by promoting higher returns on safe investments like GICs and bank accounts with interest. It also discourages borrowing by making buying items on credit, like cars and homes, more expensive. Saving when the economy is hot should cool the market and ease inflation.
This is good in theory, but when the cost of living and mortgage rates go up, it gets tough for people to afford to live. The good news is two-fold: First, as we will discuss further below, the rental market is up substantially, and rising rents should help offset some of those costs for homeowners. Second, with the current state of things, we should start seeing rates decrease in the coming year. Mortgage rates are currently highest on a short-term renewal, but banks are hedging downwards in the longer term. This should alleviate some of the pain down the road.
Calgary Sales Market
On the sales side, Calgary’s real estate prices remain high. The average price currently is just over $500,000, which is a change of less than 1% from last year but is up nearly six per cent from March of 2021, according to the Calgary Real Estate Board (CREB). Properties are selling quickly, with an average time on the market of just about a month. Still, inventory is low, with few new listings hitting the market.
Several factors are driving this trend. On the demand side, Calgary is becoming a destination for newcomers, with over 33,000 new residents coming internationally between July and September of 2022 alone. This does not account for the number of interprovincial moves that have made Calgary an attractive place to live. Alberta’s population jumped by over 120,000 people in 2022, with most moving to the two big cities. This has helped both Calgary and Edmonton buck the national trends and continue to see high prices in sales.
On the supply side, however, we don’t see the city’s housing stock as strong enough to hold everyone wanting to buy. In particular, those wanting to sell in Calgary are looking at the market and saying, “if I sell now, where will I be able to buy?” Many new developments are being built, including hundreds of new units at the University District and the massive developments coming up along the outer ring of Stoney Trail. Still, there appears to be more demand than supply for units in the city, causing the market to remain high.
Calgary Rental Market
The tight sales market is positive for landlords. The Calgary rental market is up 29.6% year-over-year from January and up over 40% in the last 18 months. This demand has been driven mainly by newcomers to the city, who are coming from markets like Toronto and Vancouver and can tolerate a larger rent price as it is still lower than the markets in both those cities. The rental stock in this city is also low, with many landlords opting to sell the units they wanted to sell when the market was down in the mid-2010s and not buying new ones.
This tide is starting to turn, with internal analysis showing that heavy rent renewals are starting to take less favourably compared to three months ago and re-leasing taking more time than previously. We sense that we are hitting the top of the market on rents and that the market will eventually begin to cool slightly back to numbers we are more used to seeing.
This won’t happen overnight. Rents are a lagging indicator, falling more gradually than sales prices and other leading indicators. New leases will likely see rents higher than previously seen in the last few years, but the percentage change will probably be smaller than we had seen six months to a year ago. Expect smaller renewal increases than last year, but we expect increases generally to take across the board.
What to Expect Next
If you are in a position to buy another rental property, now is likely not the time to do so. With the market as hot as it is currently, coupled with high-interest rates, it’s hard to see the returns on investment being great over the next five years. Our analysis shows that the market is likely to cool in time, as it typically does in this city, and at that point, it would be a far better time to buy than right now.
There will come a sweet spot where cash buyers and those who can put down substantial down payments will see an opportunity where high-interest rates will force mortgage renewals to sell quickly, allowing those with cash on hand to buy at a discounted rate. This is a move to watch for and could put you in an advantaged position. The tide is beginning to turn on this, and a savvy buyer will see an opportunity here.
As always, Amhurst remains in your corner for advice on the real estate market. With over 40 years of experience, we have seen this city’s economy at its best and worst. We can help you to maximize your real estate returns. Please do not hesitate to contact us for how to make the most of your investments.
