HOW DO INTEREST RATES EFFECT OUR REAL ESTATE

Document Sample
HOW DO INTEREST RATES EFFECT OUR REAL ESTATE Powered By Docstoc
					               HOW DO INTEREST RATES EFFECT OUR REAL ESTATE?


For the last couple of months, the US real estate market, in particular the sub prime
market, has been causing a lot of grief for both buyers and sellers south of the border.
Though it’simpact has remained mostly in the States – naturally, the information highway
brings all that paranoia up to our neck of the woods. However, there is good reason to
keep an eye on the interest rates here in Canada, as well as in the US, and both the
Canadian and US dollars as well.

After a 5 year market cycle in Metro Vancouver that ran basically from 2002 – 2006 and
gave us yearly jumps in housing prices up to 25%, prices are beginning to stabilize a bit.
This is not to say that we aren’t seeing year over year increases in property values; we
are: – but in the Fraser Valley, we are looking to post single digit increases over the next
two years. As I have said previously, Vancouver proper and the North Shore remain
different animals, and continue to jump strongly.

In the interest of comparisons though, one should study the demographics of those areas
as compared to the Fraser Valley. Where do young couples come to buy there first home?
Well, I’m guessing there aren’t too many 400K starter homes in Kerrisdale anymore, - let
alone much else for that matter. Consequently, when buyers are looking for that first
home, they tend to look towards the suburbs. And that’s where interest rates come in.

Two years ago – during the height of the real estate frenzy, you could still lock in for a 5
year term for around 4.5% over 5 years. That kept the cost of borrowing and buying low
for many first timers. It also meant that they could qualify for just that much more on
their first home. Then, with so much competition to get that home, sellers were in an
excellent position to ask a stiff price for their property. Sure enough, those home prices
pushed out of reach for many – and some ended up changing their search entirely, -
opting for townhomes that wouldn’t stretch their budget as much, or heading farther east
through the Valley where prices were a little better.

Then of course, interest rates started to rise….but it seems that some haven’t had that sink
in yet. Why does this matter? Well, the young couple that qualified for a $500K home 2
years ago might only qualify for $425K today. That means that they are going to be
shopping either somewhere else, or for something else – or maybe not at all. The reason
that interest rates rose in the first place was to stem inflation, in among other areas the
housing market. So the cycle goes like this: low interest rates (and other factors, like our
booming provincial economy) = more housing affordability = more buyers = higher
prices as demand exceeds supply. Increase those interest rates? Well, that reduces
affordability for many. That means they can’t keep chasing those new homes. It also
means that vendors cannot gratuitously add 20% per annum to the price of their home.
This is obviously a greatly simplified version of the economic picture in housing, but it’s
worth noting. It has reverberations too – if the first timers can’t get on the property
ladder, who’s going to buy homes in higher price ranges?
Will we see lower interest rates soon? Well, it’s hard to say. If we see a rate drop – that
could boost inflation. That’s why the rates are where they are now – to prevent that. It’s
also why the US is NOT raising their interest rates: they cannot afford to push the sub-
prime market and real estate into greater distress (among other things). It also help
explain why we’ve seen a declining US dollar, and a stronger Canadian dollar.

The long and short of it is: Local housing is doing fine. The forecast for real estate in the
near future remains rosy. It’s just not insane any more. Price and sell accordingly.