There is an inverse relationship between mortgage rates and housing prices.  When the Bank of Canada lowers rates, more buyers venture into the market, increasing demand and consequently raising prices.  Typically, the housing market slows down during the winter months, picking up roughly around March/spring break time. This year has been a bit different.

Typically quiet throughout December and the beginning of January, buyers began venturing out earlier than expected in the 2nd half of January this year. Some speculate that they’re hedging their bets and willing to pay higher interest rates now in the short term to avoid paying the often much inflated sticker price that comes when the housing market is robust and full of activity.

Farah Omran, Scotiabank Senior Economist, writes that “an uptick in activity and prices” is a “reasonable bet on the part of buyers” who are speculating in anticipation of rate cuts in the coming year. “What seems to have brought this process forward is buyers’ willingness to put up with some short-term pain for long-term gain”, he observed. “Buyers are pricing in a sure increase in house prices once cuts begin and are therefore choosing variable mortgages now, betting that the cuts will be significant enough to offset the higher initial payments and reduce the overall cost of the mortgage over the long-term, versus the alternative of waiting for rates to drop and buying at significantly higher prices.”

In the event that the Bank of Canada keeps their current rates, buying an average home in Canada ($659,395) with 20% down = Mortgage of $527,516 would cost a borrower approximately $81,055.70 in interest (over the term of the mortgage) if they chose a 3-year term at a fixed rate of 5.29%.   If these homes only experienced a hypothetical 5% increase in price PER YEAR over the next three years, it would result in an increase in the sticker price of $98,909.  The downpayment of this new average Canadian home would increase as well by $19,781 to $151,660.

To offset this rise in price, mortgage rates would have to decrease to 3.29% for a five-year mortgage for the same property with the inflated sticker price.  While this is entirely a possibility, it is tricky to weigh the various factors influencing home prices, including an increasing population, the challenge of building homes fast enough to keep up with demand, along with the increased costs of lumber and supplies due to inflation etc.

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