Just when you think you have things sort of figured out, the Bank of Canada decides to do 2 quick interest rate hikes. Now, real estate normally slows down a bit during the summer months.

But add in not just one – but two rate hikes – and the remainder of the summer may be even quieter than normal. Especially since the Bank of Canada now won’t even rule out additional rate hikes later this year.

Activity and pricing actually peaked in June in Centre Wellington (larger markets like Toronto peaked in May), so this sudden slowdown is even more noticeable. Compounding things is the fact the bond market really wasn’t expecting that first interest rate hike, so long term rates increased even more than the bank rate increase – a full percentage point higher than a couple months ago.

It only took a short pause (and assumption that rates had hit peak) earlier this year to bring buyers from the sidelines; now back to back increases (and the realization that rates are not coming down in 2023) may take buyers back to the sidelines.

Housing affordability has deteriorated even further. And the only way for affordability to improve is either for rates to drop … or prices to decrease. I tend to watch multiple realtor podcasts from across the country late at night on an almost daily basis, which runs the gamut from unrealistic realtors who always think the market is going to go up and up, while at the other end of the spectrum there are those who have been predicting a doomsday scenario for the market for multiple years in a row.

Amusing to watch, but in the middle somewhere there is some reality and smart observations.

A phrase one of my realtor colleagues used that I thought was interesting was “people have become trapped in their homes”. The plight of the first-time buyer is well documented (albeit with no real solutions). But the fact is there are also many people who would like to move up to their next home.

However, chances are they currently have a lower rate, and assuming they will need to borrow to “move up” to their next home, rates that are now double or even triple their current locked in rate makes the move unfeasible.

Plus, in some cases, even if the economics make sense, lack of choice means they don’t have a place to move to even if they wanted to. Hence the phrase
“trapped in their home”.

Now, the paragraph above is a good segue into the whole discussion around interest rates, which are now at the highest level in a couple decades. Yes, old guys like me remember 18% mortgages – but that was then, now is now.

The longer rates stay at these elevated levels could eventually lead to some substantial pain and disruption in the real estate market. A lot of mortgages are coming due in the fall that were around 3 – 3.5% or so and renewing in the 6% range, meaning a financial reality starting to set in for many people.

However, my concern isn’t so much this year. It’s later next year when a lot of mortgages currently under 2% start coming due. If rates are still at 6% or more then, major troubles could be brewing. Fingers crossed that rates start to ease by the third quarter of 2024. Regardless, unfortunately some people will have to sell in the months ahead.

Another aspect of higher rates is the fact the current economics of home building is challenging. In other words, building lots of homes right now doesn’t make financial sense for many builders. I only bring this up to underscore the fact that the government’s plan for a bunch more affordable homes being built in the near future is a bit of a pipedream.

While the local market may be a bit more challenging over the next number of months, detached homes under $800,000 remain in demand, and properly priced condos are selling. Two storey family subdivision homes at $1.2 million or higher are struggling.

Homes that really stand out tend to sell in any market, but the over $1.5 million segment of our market is currently pretty quiet. Interesting to note that over 50% of our resale inventory is priced over $1 million, which is rather high (by comparison, only about 30% of Kitchener Waterloo inventory is over $ 1 million).

In Centre Wellington, our overall inventory levels (homes for sale) have stayed fairly constant and relatively high in the 90 – 100 range over several months, which is different than many other markets that experienced record low inventory earlier this year. But most markets are now seeing a buildup of inventory.

It will be interesting to see if we follow suit, but there continues to be no evidence inventory is about to spike here yet. A combination of higher rates and increasing inventory would put added downward pressure on pricing moving forward.

I am not a “pollyanna” type realtor, nor am I a doomsday predictor, but rather I analyze actual data on an ongoing basis to give my clients the best advice possible regardless of when they are selling. Do not try to time the market. Sell when it makes sense for you – when you are ready.

If you are thinking of selling in the fall, let’s start a conversation. Give me a call anytime at 519-766-3716.

Until next month, take care.

George