As we kick off the new year, many families have made resolutions to enter the housing market in 2019. Whether you are thinking of finally ditching your landlord and buying your first home or selling your starter house to move into your forever home, there are two pieces of the real estate puzzle you need to watch carefully: interest rates & inventory.
Mortgage interest rates had been on the rise for much of 2018, but they made a welcome reversal at the end of the year. According to Bank Of Canada, prime rates climbed from 3.45% in June to 3.95% in October , and are projected to reach 5% in 2019.
The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power.
Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford to buy will decrease if you plan to stay within a certain monthly housing budget.
The chart below shows the impact that rising interest rates would have if you planned to purchase a $400,000 home while keeping your principal and interest payments between $2,020-$2,050 a month.
With each quarter of a percent increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000).
A ‘normal’ real estate market requires there to be a 6-month supply of homes for sale in order for prices to increase only with inflation. According to the Toronto Real Estate Board (TREB), GTA listing inventory is currently at a 3-month supply (still well below the 6-months needed), which has put upward pressure on home prices. According to TREB, Home prices have increased 5.8% year-over-year since 2014.
The inventory of homes for sale in the real estate market had been on a steady decline and experienced year-over-year drops for 5 years (from 2014 to 2018), but we are starting to see a shift in inventory over the last six months.
If you are planning to enter the housing market, either as a buyer or a seller, make sure that you have an experienced local agent who can help you navigate the changes in mortgage interest rates and inventory.