Reasoning with rates

London’s housing market and interest rates ― what’s the impact?

LAST WEEK, THE governing council of the Bank of Canada raised its target for the overnight policy rate by 75 basis points to 3.25 per cent ― and signalled that the policy rate would rise further. Along with inflation remaining stubbornly high through the summer months, wage rates continue to rise and labour markets are exceptionally tight, with job vacancies at record levels. Ongoing inflation and a tight labour market mean the policy interest rate will need to rise further, and this message was conveyed by the Bank of Canada.

Traders are now betting that another 50-bps rate hike is likely when the governing council meets again on October 25. There is yet another meeting this year on December 6, and the expectation is that the policy rate at end the year will be 4 per cent, or a further increase of 0.75 per cent.

The implications of Bank of Canada actions are considerable for the housing market. In the short term, the prime rate will quickly rise to 5.45 per cent, increasing the variable mortgage interest rate another 75 bps, which will likely take the qualifying rate to roughly 7 per cent. In the medium term (before Christmas), the qualifying rate will push closer to 8 per cent (the qualifying rate is the rate homebuyers must show they can handle when qualifying for a mortgage payment, based on their current income and expense levels).

Fixed mortgage rates, tied to the five-year Government of Canada bond yield, will also rise, but not nearly as much. Bank economists realize that the price paid for inflation control might well be at least a mild recession, which means the longer-term bond yields are not going up as dramatically as short-term rates, thus helping to keep fixed rate mortgages a little lower. The economy should slow considerably in the second half of this year and through much of 2023.  A return to the bank’s two per cent inflation target will not occur until at least 2024, and the bank’s tightening job is not finished at least until then.

The local housing market has largely absorbed the moves by the bank, which were intended to “calm” the unsustainable pricing exuberance in pandemic real estate values. House values have corrected considerably over the last four months, much faster than the rest of the economy, which continues to grapple with ongoing inflationary pressures. 

House prices are more “reasonable” as they relate to historic norms and when adding the consideration for continued housing supply shortages being forecast. It appears pricing has neared the bottom of this recent decline, falling back to the values achieved one year ago. We expect a more balanced, normalized market for the remainder of the year. In simple terms, don’t expect prices to fall much further, but do expect the cost of borrowing to rise through to the end of the year.  Now could be the time to make that move!

Market analysis provided by Marcus Plowright, Sales Representative, A Team London. Marcus can be reached at 519-872-8326 or marcus@ateamlondon.ca.

High- and low-priced real estate listings around town this week:

London East

Low

Address: 61-2189 Dundas Street East
MLS number: 40259706
List price: $150,000
Days on market: 121
Size: 1 bedroom, 1 bathroom, 600 square feet
Listing agent: Karen Greasen, Broker, Re/Max Centre City Realty

High

Address: 1745 Kilally Road
MLS number: 40284410
List price: $3,500,000
Days on market: 81 
Size: 3 bedrooms, 4 bathrooms, 4,700 square feet
Listing agent: James Hudson Smith, Sales Representative, Sutton Group-Select Realty Inc. Brokerage

London North

Low

Address: 1007-600 Grenfell Drive
MLS number: XH4128621
List price: $329,000
Days on market: 35
Size: 1 bedroom, 1 bathroom, 700 square feet
Listing agent: Ail Verma, Sales Representative, Re/Max Escarpment Realty Inc.

High

Address: 40 Sir Robert Place
MLS number: 40266200
List price: $4,580,000
Days on market: 64
Size: 5 bedrooms, 4 bathrooms, 7,650 square feet
Listing agent: Kim Mullan, Broker, Sutton Group-Select Realty Inc. Brokerage

London South & West

Low

Address: 202-198 Springbank Drive
MLS number: 40320667
List price: $149,900
Days on market: 4
Size: 1 bedroom, 1 bathroom, 661 square feet
Listing agent: Paola Forero Alvarez, Broker, Team Glasser Real Estate Brokerage Inc.

High

Address: 1939 Kilgorman Way
MLS number: 40290600
List price: $3,098,000
Days on market: 39
Size: 5 bedrooms, 5 bathrooms, 5,107 square feet
Listing agent: Klaud Czeslawski, Sales Representative, Peak Professionals Realty Inc.

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Disclaimer: London Inc. does not guarantee the accuracy of the statistical data on this page. The data does not represent the listings of any one agent or agency but represents the activity of the real estate community in the area. Any real estate agent’s ad appearing is separate from the statistical data provided, which is in no way a part of their advertisement.