Three Surprisingly Good Ways Rising Interest Rates Could Benefit The Housing Market

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After the Bank of Canada raised interest rates by .025% this past Wednesday, a number of real estate professionals became anxious over the impact higher mortgage rates will have on housing affordability. As per BNN Bloomberg, home sales have declined by more than 40% this year in Toronto, and by more in other markets. So far, there have been few signs that the market is cooling down. So far this year, home prices in the GTA have actually risen, in contrast to most predictions. As a matter of fact, the Bank of Canada’s rate-hiking activity might actually benefit the housing market. Here are three reasons why.

Consumer Psychology

There’s an entire population of first-time home-buyers who have experienced nothing but low-interest rates – that’s millennials. As a matter of fact, they are leading the charge when it comes to buying property in Canada. With the BoC raising rates three times this year and sending a signal of more hikes coming in the future, this could result in getting more home-buyers off the fence and into the market. This should increase demand during the peak selling seasons, and the added activity could have a positive impact on the economy in the quarters ahead.

Lending Practices

Higher interest rates provide lenders an added incentive to make more purchasing loans. There’s no doubt that rising interest rates will have an impact on the volume of refinance loans being issued. That said, Banking institutions and lenders may focus on financing more purchasing mortgages to creditworthy borrowers who have been excluded from the housing market for years due to Canada’s incredibly conservative lending standards. The higher rate of interest also gives them added protection against risk.

Rate Increases Are Predictable

Markets are forward-looking. As such, the rate hikes to date (as well as the increases likely to follow) have been “baked into the cake”, so to speak. This week’s 0.25% rate hike was well within the scope most analysts expected, which means this increase will not cause mortgage costs to rise considerably. If you look at 10-year and 25-year fixed mortgage rates, they are practically unchanged and are still at or near historical lows.

A motivated buyer market, more focus on purchase loans from financial institutions, and strong wage growth are all positive catalysts that could support an improvement in buying activity during the next selling season.

But those are our thought’s on the rate increases. Now, we want to hear yours. Post your thoughts and opinions in the comments below.

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