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LACKIE: Rising interest rates are already cooling the real estate market


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Here we go, friends.

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On Wednesday, after much anticipation, the Bank of Canada doubled the benchmark interest rate from 0.5% to 1%, marking the most aggressive rate hike since 2000.

With the aim of controlling inflation, this increase is far from being a surprise. At some point, the flow of cheap money that floated us through the pandemic was sure to slow down.

But for Canadians accustomed to cheap money while carrying record levels of household debt, and also facing rising costs in almost every aspect of their lives, this is a sobering and is all the more intimidating since it is simply one rate among many. bumps that we will probably see this year.

The psychological impacts of these rate hikes cannot be overstated. The psychology of the buyer is enough to cool the markets.

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In cities like Toronto, where housing prices are objectively outrageous, buyers have long had to dig deep in order to muster the mental toughness to get in the game. Now, on top of the uncertainty and fears of a correction buoyed by what we remember of the 2008 subprime mortgage crash in the United States, this courage will surely give way to a pause.

In the immediate future, there will be people who have already bought at the top and who have prepared their house to sell it. Now, let’s say they don’t read the paper or their agent doesn’t pay much attention to this market, they might have no idea what’s going on. They could still bank on a low roster and wait for the bullies to arrive. They will probably wonder why they are not overrun with projections. They will definitely be shocked when bidding night arrives and no one shows up to bid. Then you can bet they will freak out.

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I say this because that is exactly what is already happening.

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Last week, I watched offer parties come and go at four homes that would undoubtedly have been a fight just a few weeks ago. Good, but maybe not great, homes in desirable neighborhoods that pandemic buyers would have absolutely thrown themselves into, in no way deterred by bizarre layout, mutual driving, or location in a busy corner.

What are we going to do with this?

The urgency has now disappeared from the market. FOMO is gone. Buyers are still there, absolutely, although perhaps in smaller numbers, but definitely more willing to sit and wait. These homes will surely sell, but it won’t be in the boom we’re used to seeing.

For those wondering if this means the bubble has now burst, I would say that unless rate hikes continue to be felt quickly, we are unlikely to see a sharp or immediate drop in prices.

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Particularly in cities like Toronto where demand will always be strong with a large pool of buyers with big jobs and big salaries, I think it’s more likely that we’ll see a small drop in the coming weeks that will functionally eliminate some of the moss from the last few months. The market will slow down and then prices will largely swing and go sideways for a while.

But while inventory is low and we still have qualified buyers, several offers on good homes in sought-after areas are likely to remain. However, the days of a guaranteed bidding war over anything with a sign on the lawn might be a thing of the past – at least for now.

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The agents will have to rework.

Of the city’s more than 60,000 officers, how many have experience working in a down market? How many think selling a house is like putting a house up for sale? As in, you take pictures, stick a sign on the lawn, then wait for the offers to arrive. How many have learned the value of cultivating relationships with colleagues? The value of a good agent will never be more apparent than in the months to come.

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And in the meantime, it will be the people with the most to lose who will be most affected. Almost all of us will feel the effects of rising borrowing costs. But for those already feeling the agonizing pressure of how to make ends meet, this could well be more than a sting – it could be a deathblow.

Like the novice speculators who casually bought an investment condo or two without ever considering the concept of negative cash flow. Or buyers who paid Toronto prices for pre-construction in the suburbs and will find themselves unable to close after the bank assesses the property for less than they paid.

They will be the victims.

Deep-pocketed and institutional investors who understand that real estate investing is a long game will do just fine. People who are in over their heads unable to overcome this simply won’t.

@brynnlackie

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