The Truth About Rising Interest Rates

The Truth About Rising Interest Rates

Earlier this month, the Bank of Canada raised its policy rate for the seventh time this year. In an effort to fight inflation, policy rates rose by 50 basis points to 4.25%. Although these increased interest rates affect the housing market, there is always a silver lining.

Hikes in Canadian interest rates have greatly impacted consumers and businesses who use their banks for savings accounts and mortgages. After the Bank of Canada raised its price, the five biggest Canadian banks also moved to match the increase, raising their prime lending rates by 50 basis points. The prime lending rate at all of Canada's major lenders will now be 6.45%. This change will increase borrowing costs for anyone with a variable-rate loan.

This can be difficult for many Canadians as living prices have skyrocketed in the last few years. Inflation has affected the cost of groceries, rent, mortgages and home buying, ultimately leaving many Canadians hesitant to enter the real estate market.

According to TRREB, during Q3 of this year, the average rent for a one-bedroom condo in the GTA was $2,481, up 20.4% higher than the previous year.

GTA's Average One-bedroom Apt Rental

Source: Toronto Regional Real Estate Board

However, it is important to note that the real estate market has been and always will be cyclical. It goes up and down, and this is a sign of a healthy market. This means that although the prices may be high, the same price is not promised tomorrow.

For this reason, Canadians are choosing an alternative route to enter the real estate market. For many potential homebuyers, pre-construction condominiums can be the silver lining you've been waiting for.

Pre-construction condos are a great way to enter the market because your condo doesn't officially close until 5 to 7 years later which gives you enough time to save and charge future rental rates. For example, when you purchase a pre-construction condo, closings are typically years down the line, giving some time for interest rates to come down. This period also allows you to save money for closing costs, including development charges and other condo-related fees and taxes.

In reality, sales have slowed since the hike in interest rates (-49.4% in the last year), but bear in mind that rent in the GTA continues to rise. If you were to invest in a pre-construction condo as a source of passive income today, you would not be renting the unit with today's rental rates but at a rate 5 to 7 years down the road. For instance, within the last 5 years, the average rent for a one-bedroom apartment has risen from $1,976 to $2,481 – a 25.6% increase.

Additionally, an incentive to buy now as opposed to later is that the province – and the GTA, is growing at a rapid rate. Although Doug Ford has promised to build 1.5 million homes in the next decade to keep up, we are desperately fighting a deficit in supply and a surplus in demand. Waiting for the right time to purchase a home could mean that you might not be able to find the home you desire. The best time to invest was yesterday, the second best time to invest is today.

Although purchasing a condo now means facing higher interest rates than usual, the market history indicates that the price of homes will continue to rise. This means your condo could be worth far more than you bought it for today, five years from now. So, not only will rental rates be higher when your condo is completed, but also the value of your unit.

Message for Investors

It is essential to look at real estate as a long-term investment rather than short-term, especially since the long-term demand for housing will be stronger than ever. This is especially true as the country expects a massive share of immigration in the coming years, and all these people will need a place to call home. Today there is already a shortage of homes, and in 5 to 10 years down the road – the population will be higher than it is now. This means that investing in real estate for the long term is a sensible decision.

We at GTA-Homes pride ourselves on delivering quality and beneficial information to our clients. To continue learning more about pre-construction condominiums and the real estate market, register below for our free Online Condo Investment Seminar.