The Bank of Canada increased the policy interest rate by 50 bases points today, in its 7th hike in a row. The current overnight lending rate sits at 4.25% and the prime rate is 6.45%

James and Monica go over what this increase means for the real estate market and what the rate change means for their day-to-day.

This episode will cover the impact of higher mortgage payments on homeowners, how interest rate increases will affect fixed versus variable mortgages, the possibility of foreclosures, the difference in sales volume average in 2023 compared to the previous 10-year average, how different areas of Vancouver real estate can be affected, and predictions on what the following interest rate announcement will be.

Watch and listen to the Garbutt+Dumas Real Estate Podcast below and follow us on Spotify, iTunes & YouTube.

Read the Transcript Here

Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.

Monica: Groundhog’s Day guys, in December. You’ve heard us talk about it before, there has been an interest rate hike.

James: Another podcast episode talking about rates. December 7, 2022 is the date and there was a big announcement say

Monica: The overnight interest rate is up to 4.25% and it’s the seventh hike in nine months.

James: They raised it 50 basis points. They’ve been on quite a tear. Four% percent nine months?That’s a lot!

Monica: Yeah.

James: And for the, the overnight rate is, for the banks that kind of leads to the prime rate following and the prime rate will go from 5.95% to 6.45%. And so the people out there that chose that variable rate mortgage are feeling it right now. And one of the common topics that you hear out there is “trigger rates” like your mortgage is being triggered because your payments are no longer covering the interest. 

And so what a lot of people out there that might be listening to this that have variable rate mortgages, they’ve noticed their payments going up lately. And this rate announcement is not a 50 basis point announcement I don’t think is going to, is unexpected, because I think no, I have no proof but prior to this episode, Karl asked me what I think it was gonna be I said 50 basis points. And I said that because I thought it should be 25 not that I’m a wizard at this stuff by any means. But last time we did the rate announcement, the US did a 75% basis point announcement. So the US raised theirs higher. So I thought because the US went higher ours wouldn’t be that low. So I’m not surprised with the outcome. 

But, I’m a little concerned about the aftermath. Hopefully this is the last of it. I think there’s a good chance it might be but I also think if it’s not the last step, but I think the next rate announcement should be a small one. But what do I know? 

Monica: We’re hitting some interesting milestones. This is the highest that the rates have been since January 2008.

James: And that was a peak before a trough of a market and what happened that was,so  January 2008, it was at this level and towards that summer of 2008, the market crashed and in the fall of 2008, call it from August to August 2008 to January 2009. I think there’s about a 20% dip in prices. 

Banks were collapsing in the US. It was it was a very different environment today. I think this, this pattern of events moving forward might be completely different than that. But if we followed suit, that would mean that the later half of 2023 might see a further downward pressure on prices. If there’s a lag in market like there was in 2008. I don’t think that’s gonna happen. But what I think doesn’t matter.

Monica: Something that was very prevalent in 2008 and 2009 were foreclosures. What are your thoughts on foreclosures in Vancouver?

James: I don’t see them. So I think one of the big differences between now and then is the foreclosures were more prominent. And maybe they will be in 2023. But in 2022, it’s negligible, I just don’t see that. And I think, I think one of the reasons is people have more equity. And there are probably some distressed sales but those distressed sales still have equity in them. Now there are going to be exceptions now because there are people that paid 10-15% higher prices in February-January of this year than they could sell for today. That’s so oftentimes you see foreclosures more prominently when the people that are foreclosed on paid a higher price than it’s worth today.

Monica: More recently, right? 

James: Yeah. You know, have you seen any foreclosures?

Monica: I haven’t. I’ve had a lot of clients call me and ask like oh, are there any deals out there that they smell blood in the water but, but there aren’t. I mean, yes, there’s deals out there but not foreclosure type deals. 

James: It’s been a while since I’ve been at the courtroom with the lawyer wondering, submitting my sealed bid for the client in a room of other people that are offering on the same place. If you’ve ever been to a foreclosure sale, it’s quite an interesting process. It’s a good one to try. But that’s not what we’re talking about today.

Monica: The last time I won one of those was in 2017 I think and that’s like few and far between. 

James: So it’s been a while. 

Monica: Yeah.

James: So the the short term impact of this rate announcement is that a lot of people are paying a higher mortgage payment. What that might have what 2023 will bring like, let’s the spring will start showing its colors of who that’s going to impact because there are legitimately people that probably own properties right now that can’t make that payment or are struggling to make that payment. 

What if, you were to guess, what do you think’s gonna happen in the first quarter of 2023? When you think of, let’s call it the forces in the world of higher rates that are causing more distress and disturbance VS the natural season of real estate where there’s naturally more buyers and sellers that show up at the start of the year versus after a holiday season?

Monica: Well, interestingly, like January can be a very light month, so can December for, for real estate and you know on the Bank of Canada website, it says it takes 18 to 24 months for us to feel the effect of these interest rate hikes. I think that, that stat is maybe angled towards inflation and different things. 

Whereas on the real estate market, we feel these things quite literally overnight when there’s an interest rate hike. People who have pre approved mortgages, those pre approved mortgages changed, they can rather quickly almost instantly. And especially in Greater Vancouver, I’ve noticed, like we’ve talked about many times the mob mentality, the fear factor, the clickbaity things that we see online, those really affect buyer sentiment and buyer feeling when they’re out there. So I do think it’s going to affect it at the beginning of the year. I think we’re gonna see people do the sit back and wait, see what happens type of thing. 

But at the end of the day, the supply in Vancouver is low. I think that you know, the new rental restrictions being lifted is going to help some people that are in a pinch because if they don’t want to sell but they can’t afford it, they can move back in with Mom and they can rent their place. So I think we’re gonna see a lot more of that than, then fire sales. I think that people are pretty stubborn with prices when it comes to their, their property in Vancouver and they don’t like to give it away. We run into many sellers lately that are priced a little out of the market value range because they were, been on the market for three months. And the market values changed in the last three. I think we’re gonna see some people remain stubborn throughout throughout the winter months.

James: There are, I mean, there’s, there’s still a lot of people in the city that want to move. And there’s people that are upsizing. There’s a lot of immigration anticipated so they’re even in a high rate environment, I could see the market doing okay, but by “OK” I still think that 2023 is likely to be, at least in that first half of that month over month probably under the 10 year average in terms of sales volume. Like I don’t see January, February, March having sales volume that’s above the 10 year average. I mean just to kind of put that in perspective, the November stats when they were released November sales were 36% below the 10 year average and we’ve been below the 10 year average since spring. I don’t remember exactly which month but I think that’s like in terms of a specific measurable. 

I think rates need to come down or at least stop throwing up for that to start happening. And if you look at kind of patterns, and we were kind of repeating some of the stuff that Denny and I did in the last rate announcement podcast but you know 2008, if I remember correctly, the peak rate, the peak bank prime rate was around for approximately half a year, but the prime rate was high for I think as much as 18 months or at least 12-18 months. 

We may live in a world where things happen quicker. But I when I look at my listen to the podcast and the speculation that I’m listening to out there. A lot of, a lot of people think that, this we’re at 6.45% now that, that is around a lot of people’s guess of where it will peak. And there’s a lot of talk that in the latter half of 2023 we’ll start seeing it come down. 

And one thing I will mention is I am on an email list for lots of things and some of them are mortgage brokers and a lot of mortgage rates right now are between 5%- 6% for like, call it, six month terms to one, two, three year fixed mortgages. But I did notice a five year fixed was offered under 5%. So when you, you know, yes, the short term mortgages are call it, five and a half, 5.9%. But you might be able to get a 4.9%, 5 year fixed and in 2008 I remember a client getting a five year fixed at 5.99%. So the rates that are offered today, in theory are better than what we’ve seen in the past. So we can absorb a little more damage but I don’t think too much more and not for a long period of time. 

Monica: Right. I think emotionally people innGreater Vancouver aren’t going to be able to handle another rate hike. If it goes over the 2008, the January 2008 number I think emotionally people aren’t going to be able to deal with it. I think that that will be a nail in the coffin for a little while for the market. I don’t see, I don’t see people being able to get past that.

James: I always said if rates got up to like 5% nevermind 6.45% The sky is gonna fall and the world’s gonna fall apart because our real estate prices are so high. The only exception to that is it can be the rates can be high for a short period of time and have relatively minimal impact. Right now we’re talking in December, it’s always a slow month. But if rates are high in May, that’s where I’m very curious to see where the colors start showing.

Monica: Right and again like history usually repeats itself and Vancouver has a very bounced back market. It gets right back into shape when, when the market when the, when the rates start to go down.

James: Vancouver can go against the grain as well, Vancouver can, you can have macro stats where you might see Canada housing prices go down 10-15%, But Vancouver goes the other direction it goes up 10%. It’s gone against the grain in the past. It’s a unique city. We will see.

Monica: Hang in there guys.

James: If you made it this far in this episode and wait, you can’t, and you can’t wait till our next bank rate announcement episode. When the next announcement is? I believe in January, oh jeez, I’m putting Karl on the spot here. January 22 Karl. Is that what it is? January 25th. That’s when the next bank rate announcement will be. You can bet that we’ll have a podcast on it. 

Monica: We’re gonna run out of stuff to say guys

James: If you’ve made it this far, we appreciate you listening. If you are in a situation where your mortgage payment is getting too high and you need to sell, we would love to hear from you.

Monica: We’re happy to give advice on if it’s the right thing to do to sell, if you maybe can hold on to it. We’re happy to help and guide you in any way. We have a lot of experience with homes where people are under a lot of pressure to sell.

James: And oftentimes our recommendation is not to sell in December. But there is an argument for a January-February, you know attempt or try depending on what product you have. And this is where we help bring clarity to clients. So if you’re thinking about doing something, uncertain, reach out, we’d love to help.

Monica: Remember there’s a lot of blanketed statements out there in the media. You need to get very pointed information that helps you and pertains to you and your property.