Declining interest rates have been contributing to a rise in real estate prices across Canada. Today, the Bank of Canada (BoC) decided to raise interest rates, in an attempt to stop out of control real estate price growth in Toronto and Vancouver. This got me thinking, in the past when interest rates rose, how much did it actually impact real estate prices? Turns out, not as much as you would think.
The Mechanics of Interest Rates
Interest rates are directly tied to how much money people can borrow on their mortgage. Slashing interest rates generally allows for a 3% increase in borrowing power per 0.25% lowered. One of our other authors showed the direct correlation between the slash of interest rates and home prices up to 2015. The opposite is also true, where a 0.25% increase in rates correlates to a 3% decline in borrowing power. Not a lot has been written about the correlation of rising rates and home prices however, so we pulled some numbers to see what we could find.
Last Interest Rate Hike Was In June 2010
This isn’t the first time interest rates have been hiked, but it’s been a while. In June 2010 interest rates rose from 0.25% to 0.5%. One month later, it got another hike to 0.75%, before reaching 1% by September 2010. It stayed at that level for a few years, before getting a double rate cut back to 0.5%.
Source: Bank of Canada, Toronto Real Estate Board, and Real Estate Board of Greater Vancouver.
Toronto Prices Stalled For 7 Months
Rising rates had minimal impact on cooling home prices. In May 2010, the composite benchmark price was $405,800. The hike to 0.5% produced a 0.59% decline in Toronto home prices. 0.75% produced a 1.14% decline. The strange thing is, the next hike didn’t produce a decline – prices increased. After three rate hikes, prices recovered by January 2011 – when prices hit $407,700. So 3 rate hikes meant 7 months of stalling prices. Not exactly what I would have expected.
Vancouver Prices Stalled For 9 Months
Vancouver real estate saw a similar reaction to rate hikes. In May 2010, the benchmark price of composite homes was $578,500. After the same number of hikes, prices stopped dropping in November. By March 2011 the benchmark surpassed the May 2010 price, when it reached $586,100. A couple months longer than Toronto prices stalled for, but once again it’s not quite what I expected.
While slashing interest rates has a fairly clear cut relation to price increases, it appears rising rates don’t necessarily reverse that change. Every 0.25% increase in interest rates does reduce borrowing power by ~3%. Somehow Toronto and Vancouver buyers found the extra money.
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