Real Estate

Do rising interest rates trigger lower housing prices?

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  • Aug 15th, 2016 11:44 am
Deal Expert
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Apr 21, 2004
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Do rising interest rates trigger lower housing prices?

I'm not trying to be another hipster but read a post on the Vancouver 15% tax thread yesterday that got me thinking. So I decided to google whether rising interest rates forebode peaking or lower property prices (since I'm no Economists or Wall Street expert) but according to these articles, it simply isn't true. Of course it would be different if interest rates shot up to the low double digits.

http://www.bankrate.com/finance/mortgag ... rices.aspx
https://www.integratedmortgageplanners. ... se-prices/
http://www.forbes.com/sites/billconerly ... f82627a978
http://economistsoutlook.blogs.realtor. ... me-prices/

Any thoughts? Won't the maximum amount that can be borrowed shrink slightly from the current 5.5x gross income? If that's the case, will non-detached properties start catching up with detached property prices if the latter becomes out of reach for many households? Of course, the cost of renting also plays a big role in the buy/rent decision.
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Banned
Aug 3, 2005
1235 posts
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Yes and no. Interest rates are just one aspect of these prices. The other aspect is simply supply vs demand. There is no much supply and people are just waiting on the sideline with cash in hand, and can be waiting for the next 3-4 years The second a property hits the market, people are throwing money at it. This is the main cause of bidding wars. Interest rates could cool that down, but a 2-3% spike probably wont do much in Vancouver or Toronto.

No one really know, but chances are, rate could stay this low for the next decade or so.
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Dec 27, 2009
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Victoria, BC
Yes, they do. People nowadays are all about the monthly payment. Low interest rates have helped to increase the prices (people buy whatever they can afford monthly). Increasing interest rates will have the opposite affect. People can only afford to pay what they can afford to pay.
Deal Addict
Jan 20, 2016
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Houston, TX
Chickinvic wrote: Yes, they do. People nowadays are all about the monthly payment. Low interest rates have helped to increase the prices (people buy whatever they can afford monthly). Increasing interest rates will have the opposite affect. People can only afford to pay what they can afford to pay.
"All" it too general number and is quite the same as "noone" in terms of accuracy :) . With median mortgage is 2x yearly income it's looks like not "all" have problem. Actually 1/3 said that they will have "difficulties" (not the inability btw!) to pay mortgage if monthly payment will be increased...on 10% (that's equivalent of rates are up 1%, which looks not very probable in next couple of years)
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Deal Addict
Jan 2, 2015
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Toronto, ON
Higher interest rates would probably force some people into foreclosure, and with more houses for sale the supply would go up. It would take a lot of interest to cause this though, as people will heroically hang onto their house past the point of making sense, and because a lot of people have fixed rate mortgages and can ignore interest increases until the term ends (could be several years before that happens).

Higher rates would also discourage new buyers, reducing demand. As demand is very high, you might see only a small reduction in buyers.
Deal Fanatic
Nov 24, 2013
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Kingston, ON
Rates don't just rise in a vacuum. Ultimately it's the Bank of Canada's monetary policy that drives the rate, and if they raise it, it will be on good economic data. Same with the bond yields that drive fixed rates.

Basically, higher rates will be a reaction to a scenario of high demand & rising prices (which exists now, but largely in only two big markets) and booming economy (mixed bag right now), and it will theoretically have a cooling effect. Whether that cooling effect simply slows price growth (like blowing A/C at an oven) or actually lowers prices depends on the extent of the hike and the prevailing circumstances.
Member
Jul 4, 2013
217 posts
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Toronto, ON
Chickinvic wrote: Yes, they do. People nowadays are all about the monthly payment. Low interest rates have helped to increase the prices (people buy whatever they can afford monthly). Increasing interest rates will have the opposite affect. People can only afford to pay what they can afford to pay.
I agree. People base housing "affordability" on what they can squeeze by on each month (in addition to "gifts" and "loans" from other sources, like their parents), with little to no contingency. When they do get extra money, it does not go to service debt, but ends up in a cash register.

It does not take much to upset the apple cart when people are putting everything they have into housing. A slight rise in rates, followed by an unexpected job loss, critical housing repairs, or a sudden health setback can have devastating consequences. If the stats on ballooning household debt are correct, many, many households are walking a very precarious tightrope that can easily snap given the right (or wrong) turn of events. The problem isn't so much that one thing, like a rise in rates, can cause an upset, it's that one thing is almost always followed by other things, all of which can contribute to a negative downward spiral.
Deal Expert
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Oct 26, 2003
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yes, but vancouver has a special case, that's not an interest rate hike but a tax hike, and it's only against foreigners, not across the board

in the short term, interesting will be going down further in the next few months
Deal Addict
Oct 1, 2006
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Absolutely. Interest rates have a huge impact on RE prices.

Let's assume I purchase a condo in Toronto and rent it out. Achievable cap rates at the moment are between 2-3%. That's OK in this low interest rate environment, because other investment like e.g. government bonds pay less than 1%.

If government bonds should go back up to e.g. 5%, this condo investment would now be an awful investment. Why rent out condos for a "profit" of 2-3%, when I can get 5% with save government bonds. Condo prices would crash in such a scenario.
Sr. Member
Aug 15, 2013
881 posts
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Guelph
asa1973 wrote: "All" it too general number and is quite the same as "noone" in terms of accuracy :) . With median mortgage is 2x yearly income it's looks like not "all" have problem. Actually 1/3 said that they will have "difficulties" (not the inability btw!) to pay mortgage if monthly payment will be increased...on 10% (that's equivalent of rates are up 1%, which looks not very probable in next couple of years)
You do realize 1/3 is a huge number. More importantly, the question is not whether rates will rise in next few years or not, but rather whether rise in rates will have an impact on house prices?

For all those claiming about demand fuelled increase, you need to understand demand and price of the commodity are interdependent, low prices tends to lead to high demand and in this case, price is interest rates i.e. low interest leads to demand. Simply put, do you see the demand sustaining if the rates were 5%? Don't think so.

Moreover, for better part of the last decade, lower rates has been combined with large sums of QE all over the world and these two combined have led to worldwide asset bubble. A rise in rates will also end QE. And if these led to increase in asset prices, it surely makes sense that a reversal in these two factors will have the reverse impact on asset prices.
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Jan 20, 2016
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Houston, TX
dundeal wrote:

You do realize 1/3 is a huge number.
You do realize "having difficulties" =! unable to make payment. For someone it's eating out once per week instead of twice or no new car this year.
For all those claiming about demand fuelled increase, you need to understand demand and price of the commodity are interdependent
For those who believe in mythical foreigners do not forget about GTA population (e.g. LOCALS) is doubled in 20 years, where do those people have to live? New construction is lagging. Even if all should follow those proclaimed advice to rent - WHERE all them will live? Vacancy rate in Toronto is about 1.5% , try to find GOOD quality rental property - not so easy. How many NEW rental buildings been built last 5 years? Supply shortage is present on whole RE market, rental as well. Demand is fueled PARTIALLY by low interest rates, but in very big part by PHYSICAL demand due to increased population. Check places with low or negative inflow - prices are not rocketing even with same low rates ;)
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Apr 21, 2004
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asa1973 wrote:
dundeal wrote:

You do realize 1/3 is a huge number.
You do realize "having difficulties" =! unable to make payment. For someone it's eating out once per week instead of twice or no new car this year.
For all those claiming about demand fuelled increase, you need to understand demand and price of the commodity are interdependent
For those who believe in mythical foreigners do not forget about GTA population (e.g. LOCALS) is doubled in 20 years, where do those people have to live? New construction is lagging. Even if all should follow those proclaimed advice to rent - WHERE all them will live? Vacancy rate in Toronto is about 1.5% , try to find GOOD quality rental property - not so easy. How many NEW rental buildings been built last 5 years? Supply shortage is present on whole RE market, rental as well. Demand is fueled PARTIALLY by low interest rates, but in very big part by PHYSICAL demand due to increased population. Check places with low or negative inflow - prices are not rocketing even with same low rates ;)
Is Canada very different from the US where jobs are highly concentrated in major city centers, like the GTA? It seems our R/E is getting pricier, almost in line with some of the bigger employment centers in California like San Franciso and San Jose. I'm very surprised after having this article:

For the first time, a metro’s median home price tops $1 million mark
http://www.marketwatch.com/story/for-th ... 2016-08-10
Sr. Member
Aug 15, 2013
881 posts
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Guelph
asa1973 wrote:
You do realize "having difficulties" =! unable to make payment. For someone it's eating out once per week instead of twice or no new car this year.

For those who believe in mythical foreigners do not forget about GTA population (e.g. LOCALS) is doubled in 20 years, where do those people have to live? New construction is lagging. Even if all should follow those proclaimed advice to rent - WHERE all them will live? Vacancy rate in Toronto is about 1.5% , try to find GOOD quality rental property - not so easy. How many NEW rental buildings been built last 5 years? Supply shortage is present on whole RE market, rental as well. Demand is fueled PARTIALLY by low interest rates, but in very big part by PHYSICAL demand due to increased population. Check places with low or negative inflow - prices are not rocketing even with same low rates ;)
I will be the mature one here and will not pay attention to your petty insults.

Am not sure where in my post did you read anything about foreigners driving house prices. Read again, my post was about interest rates and QE driving asset prices. Quoting a post and then arguing on factors not part of that quote doesn't make much sense, assuming you are not trolling.

Also, never did I say house prices are going to drop tomorrow, next year or anytime soon. OP asked about interest rate impact on house prices, for which i explained they do have an impact. No one knows when the rates are going to rise, so keep worshiping your house. and stop making this thread another RE bull vs bear thread. Every discussion doesn't have to come to that.

Moving on to your argument about population rise, I checked statscan (link below) for population growth rate and here are excerpts from it:

"For a third consecutive year, the four fastest growing CMAs were in Alberta and Saskatchewan, with Calgary (+3.6%) reporting the largest population growth. It was followed by the CMAs of Edmonton (+3.3%), Saskatoon (+3.2%) and Regina (+2.8%). Kelowna (+1.8%), Winnipeg (+1.6%) and Toronto (+1.5%). International migration was responsible for just over two-thirds of the population growth of CMAs in 2013/2014. The population growth rates of Canada's three largest CMAs—Toronto (+1.6%), Montréal (+1.2%) and Vancouver (+1.3%)."

So if population growth is the driving force behind house prices, Edmonton and Saskatoon house prices should be growing at double the pace of Toronto, and Toronto should be growing much faster than Vancouver and Montreal should not be far behind Vancouver. Well, the fact is none of these statements are true. Actually, Edmonton prices are barely growing while Toronto and Vancouver are growing in double digits while Montreal price growth is not even close to Vancouver. Additionally, population growth is less than 2% in Toronto and Vancouver while house prices are growing is in double digits to say the least. For all Canada, population growth is 1.1% while house price growth is 11%. i.e. Housing price growth is not in tandem with population growth i.e. population growth is not THE driving force behind house prices.

http://www.statcan.gc.ca/daily-quotidie ... 1a-eng.htm
Deal Addict
Nov 26, 2005
3214 posts
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Vancouver
I'd say low interest rate is the biggest drive for price increase. a lot of rent vs buy calculation make tip over to the buy side with low interest rate, this is the biggest source of demand.
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Sep 23, 2014
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Just an FYI to everyone, housing price is the least of concern when it comes to changing the rates for the central banks around the world (canada included)
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Jul 9, 2004
1572 posts
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Delta
asa1973 wrote:
dundeal wrote:

You do realize 1/3 is a huge number.
You do realize "having difficulties" =! unable to make payment. For someone it's eating out once per week instead of twice or no new car this year.
For all those claiming about demand fuelled increase, you need to understand demand and price of the commodity are interdependent
For those who believe in mythical foreigners do not forget about GTA population (e.g. LOCALS) is doubled in 20 years, where do those people have to live? New construction is lagging. Even if all should follow those proclaimed advice to rent - WHERE all them will live? Vacancy rate in Toronto is about 1.5% , try to find GOOD quality rental property - not so easy. How many NEW rental buildings been built last 5 years? Supply shortage is present on whole RE market, rental as well. Demand is fueled PARTIALLY by low interest rates, but in very big part by PHYSICAL demand due to increased population. Check places with low or negative inflow - prices are not rocketing even with same low rates ;)
"Demand" isn't just the desire to buy and live in these places. If higher interest rates reduce the ability for people to pay higher prices, they'll offer less or go elsewhere. There is some elasticity in how much people can pay, but I think most folks are to stretched to their limits at this point. You are banking on the rich foreigners if you think people will just magically pony up more cash. Also low vacancy rates are not necessarily a perpetual problem.
Deal Addict
Jan 20, 2016
2028 posts
1013 upvotes
Houston, TX
dundeal wrote:
asa1973 wrote:
You do realize "having difficulties" =! unable to make payment. For someone it's eating out once per week instead of twice or no new car this year.

For those who believe in mythical foreigners do not forget about GTA population (e.g. LOCALS) is doubled in 20 years, where do those people have to live? New construction is lagging. Even if all should follow those proclaimed advice to rent - WHERE all them will live? Vacancy rate in Toronto is about 1.5% , try to find GOOD quality rental property - not so easy. How many NEW rental buildings been built last 5 years? Supply shortage is present on whole RE market, rental as well. Demand is fueled PARTIALLY by low interest rates, but in very big part by PHYSICAL demand due to increased population. Check places with low or negative inflow - prices are not rocketing even with same low rates ;)
I will be the mature one here and will not pay attention to your petty insults.

Am not sure where in my post did you read anything about foreigners driving house prices. Read again, my post was about interest rates and QE driving asset prices. Quoting a post and then arguing on factors not part of that quote doesn't make much sense, assuming you are not trolling.

Also, never did I say house prices are going to drop tomorrow, next year or anytime soon. OP asked about interest rate impact on house prices, for which i explained they do have an impact. No one knows when the rates are going to rise, so keep worshiping your house. and stop making this thread another RE bull vs bear thread. Every discussion doesn't have to come to that.

Moving on to your argument about population rise, I checked statscan (link below) for population growth rate and here are excerpts from it:

"For a third consecutive year, the four fastest growing CMAs were in Alberta and Saskatchewan, with Calgary (+3.6%) reporting the largest population growth. It was followed by the CMAs of Edmonton (+3.3%), Saskatoon (+3.2%) and Regina (+2.8%). Kelowna (+1.8%), Winnipeg (+1.6%) and Toronto (+1.5%). International migration was responsible for just over two-thirds of the population growth of CMAs in 2013/2014. The population growth rates of Canada's three largest CMAs—Toronto (+1.6%), Montréal (+1.2%) and Vancouver (+1.3%)."

So if population growth is the driving force behind house prices, Edmonton and Saskatoon house prices should be growing at double the pace of Toronto, and Toronto should be growing much faster than Vancouver and Montreal should not be far behind Vancouver. Well, the fact is none of these statements are true. Actually, Edmonton prices are barely growing while Toronto and Vancouver are growing in double digits while Montreal price growth is not even close to Vancouver. Additionally, population growth is less than 2% in Toronto and Vancouver while house prices are growing is in double digits to say the least. For all Canada, population growth is 1.1% while house price growth is 11%. i.e. Housing price growth is not in tandem with population growth i.e. population growth is not THE driving force behind house prices.

http://www.statcan.gc.ca/daily-quotidie ... 1a-eng.htm
In your outstanding mature analysis you just missed the second half of equation - supply (remember, it's supply AND demand). Population growth 3% with 5% supply growth will have price going down. While 1.5% population growth with 0.5% supply will lead to price increase.
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Sr. Member
Aug 15, 2013
881 posts
419 upvotes
Guelph
traderjay wrote: Just an FYI to everyone, housing price is the least of concern when it comes to changing the rates for the central banks around the world (canada included)
Very true, especially in current situation where the world economy is facing a real risk of deep recession. The low rates and QE are geared to spur consumption demand and bring inflation to target levels. But then, the question is impact of interest rates on housing demand/prices and you're saying the other way round i.e. impact of housing prices on interest rates.
Sr. Member
Aug 15, 2013
881 posts
419 upvotes
Guelph
asa1973 wrote: In your outstanding mature analysis you just missed the second half of equation - supply (remember, it's supply AND demand). Population growth 3% with 5% supply growth will have price going down. While 1.5% population growth with 0.5% supply will lead to price increase.
Ok so you are saying housing supply growth rate < population growth rate.

In the long run, lets assume Housing sales <= housing supply, simply coz you cant have sales without supply i.e. if supply is 200, sales cannot be more than 200. Now as per CREA(see attached link), housing sales/month have risen from the lows of 26,000/month in 2009 to 45,000/month in 2016. That translates into a compounded growth of roughly 8% / year vs population growth rate @1.1%. Clearly, housing sales(supply) is growing at a much faster pace vs population.

http://creastats.crea.ca/natl/index.htm
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Apr 21, 2004
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^ I'm no expert for sure but sales may be going up from 2009 to 2016 but that doesn't seem to imply that the housing supply is going up more than the population growth. It means that more sellers are willing to list their properties as they they have experienced significant appreciation (and think the market has peaked) while buyers are having fewer opportunities buying new construction and have to resort to the resale market. People who sold, will have to move around town after all, if they are not moving to a new city / province / country.

Also, the increase in sales reported by CREA could also mean that the supply of new builds from builders are dwindling over time (because of scarcity or increase in land prices due to proposed expansion of the green belt), which explains why transactions are increasing in the resale market.

=====

Anyway, enjoying and learning from people's take on this matter.

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