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Inflation, Interest Rates, and the Inevitable Real Estate Market Cooldown

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Both locally and acros the country, the real estate market is cooling down as interest rates heat up. Joey Villanueva

Post-pandemic inflation has affected virtually every commodity available to Manitobans by now, putting a massive strain on consumer pocketbooks this summer.

It should come as no big surprise then that interest rates are following the same upward trajectory. Raising interest rates is how the Bank of Canada has chosen to try taming those nasty inflation rates.

For those in the market for a new home, however, it’s not a welcome compromise.

Clarence Braun has been a real estate agent in the Niverville area for the past 20 years. He’s watching with a keen eye to see where the real estate market heads next after years of low mortgage rates.

“We’ve got sellers and buyers right now that are experiencing something different than they’ve experienced in the last 20 years,” Braun says. “We’ve had moderate interest rates for a good period of time.”

Interest rates jumped a full one percent in July and Braun can foresee the possibility of another half percent jump in September.

“If [the Bank of Canada] sees that the inflationary pressure is already on the downside, they may not go up,” Braun says. “But they definitely want to cool it down a bit.”

As was predicted, Braun says his company began seeing a slowdown in home sales in June, and even more so in July, almost immediately after the rate hike announcements were made.

As of early August, home sales were down by about 20 percent from this time last year, he says. And the homes that are currently on the market are staying on the market longer and getting fewer competing bids.

In the spring of this year, Braun says, it wasn’t unusual to see used homes get five or six competing bids. Sellers often closed on figures well over their asking price.

But there’s more to the recent cooldown than just lending rates, he believes.

“There’s a second reason why I think [housing sales have] slowed down this year and I think it’s equal to the interest rate issue,” says Braun. “That’s the fact that, for the first time in three summers, people can actually hang out with friends and [everyone] just wants to maximize the opportunity to spend time together.”

For this reason, he adds, in another month a much clearer picture will present itself—when kids return to school and families return to routines.

Influenced by the housing bubble of 2008, the Bank of Canada and the federal government introduced a new aspect to the lending system a few years ago that changed the real estate market. It was called the stress test.

Prior to the introduction of the stress test, a borrower’s annual income needed only to support the current interest rate of the day. The stress test introduced a buffer of an additional two percent. So, if the going mortgage interest rate was 2.25 percent, the borrower now had to demonstrate that their income could actually support a 4.25 percent rate.

This stress test, Braun says, will have set the stage for many recent homebuyers to endure a rise in interest rates, reducing the shock to the household when it happens.

There are also those who are currently on the market for a new home but prequalified for a loan when interest rates were still low. Many lenders, he adds, were guaranteeing those prequalifying interest rates for anywhere from 30 to 90 days into the future.

“The shock will be for those people who are entering the market right now and have not been prequalified for a mortgage,” Braun concludes. “They’re coming in… and are going to have to qualify for two points over [whatever the new rate is going to be]. So, if it’s five [percentage] points, you’re going to have to qualify for seven. It’s definitely going to impact the housing market a little bit.”

Regardless of inflation or rising interest rates, Braun hesitates to speculate on whether we’ll see a recession. He’s lived through harder times, like the 1980s. Back then, just months after getting into the restaurant business, his interest rates skyrocketed to an unprecedented 21 percent. He remembers that banks worked with most clients to help them get through it.

From Braun’s perspective, we’re not seeing some of the benchmarks of a typical recession.

“When was the last time we had a recession in Canada where employers were understaffed in the labour market by upwards of six to eight percent?” Braun asks. “Every employer in Canada is looking to hire and they can’t find employees. That doesn’t speak of a normal recession in any way, shape, or form.”

In a typical recessionary period, he adds, businesses are scaling back and laying off employees. Now they’re ramping up business and expanding their services. Why? It all boils down to demand.

This was also true for the housing market in the spring of 2020 as the pandemic rolled into the province. Fear of the unknown took hold of the marketplace for a brief few weeks and people stopped spending. Then the Bank of Canada dropped interest rates to boost economic spending.

But even so, few would have predicted the boomtown affect this would have on home sales over the next two years.

The market quickly became unbalanced with the ratio of buyers to sellers being way out of proportion. This, Braun says, is how the price of a home rose to all-time highs.

The problem of supply not meeting demand may have been exacerbated by a pandemic, but according to a June 2022 post that Braun cites on the Canada Mortgage and Housing Corporation website, the housing supply across Canada was already a concern in 2018.

“If the current rates of new construction continue, we project that the housing stock will increase by 2.3 million units between 2021 and 2030,” the site states. “To restore affordability [in housing], an additional 3.5 million affordable housing units are needed by 2030.”1

Braun indicates that Niverville’s current housing market is no exception, especially when it comes to used housing options. As of the early days of August, Braun says there were only 22 homes listed on the market and only seven of those homes were used. In 2015, he says, there were 45 houses for sale in Fifth Avenue Estates alone. Most of them were used homes.

“We haven’t been over 30 houses for sale in Niverville now for, I would say, a year and a half,” Braun says.

The playing field was so uneven at times during the pandemic that real estate agents were calling homeowners who hadn’t listed their homes just to see if they’d consider putting it on the market.

This supply and demand imbalance has also affected the rise in the cost of entry-level homes, driving up people’s perception of what qualifies as “affordable.” Just a few years ago, Braun says the price of a 1,200-square-foot entry-level home was around $270,000. Today, affordable entry-level homes are more in the range of $330,000 in Niverville.

Doug Dyck has been president of Heritage Lane Builders for 35 years. He describes his many years in business prior to COVID as years of progressive, steady growth.

In the spring of 2020, he says, the growth became explosive.

“Our houses were being sold before they were built,” Dyck says. “In the past two years I’ve hardly been able to stage a home, whereas at any given time previously I was staging up to four homes at a time.”

As well, Dyck says, sales kept a steady pace right through the summer months during 2020 and 2021, unlike most other years when sales tend to slow down during the holiday months.

“Manitoba has always been the Steady Eddy,” Dyck says, referring to the general lack of the extreme market ups and downs experienced in other provinces. “There was nothing exciting here—with the exception of the last two years. Things started to just get crazy.”

Dyck confirms that Manitoba has fallen sadly short of supply. This is hard to believe, he admits, when new developments are popping up everywhere all the time. It may be connected to the fact, he thinks, that Manitoba is still one of the most affordable provinces in the country to live.

Dyck says that the Manitoba market had some catching up to do in order for it to get a little closer to where we needed to be in comparison to other provinces. The pandemic will have helped that to happen.

“The bigger question is, can the consumers bear the cost of rising interest rates?” Dyck says. “If they can’t, they go into rental or scale down and then scale up when things settle down.”

But having seen this cycle so many times before over the years, consumer fear usually only has a short-term effect on the market.

“In the past, when banks introduced the stress test, it effected the market immediately,” says Dyck. “Media can play a role as well, as there can be a focus on the negative and how it will impact buyers. What we have seen is that the consumer needs time to adjust and rethink their timing as to when and what to purchase. Not a negative thing, really. [It just] keeps purchasers from overextending themselves. Once this adjustment happens, the market opens up again.”

As for the advice he’d give any new homebuyer in this market, Dyck says, “Do your own stress test. I take no pride in selling a home to someone who really can’t afford it. That dream home can become your biggest nightmare… Get yourself strong first.”

1 “Canada’s Housing Supply Shortage: Restoring Affordability by 2030,” Canada Mortgage and Housing Corporation. June 23, 2022 (https://www.cmhc-schl.gc.ca/en/blog/2022/canadas-housing-supply-shortage-restoring-affordability-2030).

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