Recent interest rate hike likely to cool Edmonton’s homes markets

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Another rate hike and another expected decline in resale activity are expected in Edmonton’s typically busier fall market.

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The Bank of Canada raised its overnight funds rate by 75 basis points this month, which is expected to further dampen selling activity.

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“If you’re looking for a home… you’ll find that this increase makes things more expensive,” says Phil Soper, president and chief executive officer of Royal LePage in Canada.

Activity has already fallen sharply from record highs in March after the central bank began raising interest rates to curb high inflation.

Still, the impact of the recent rate hike is likely to have a “neutral effect on current activity,” Soper argues, as many buyers have already been pre-approved to hold interest rates.

Overall, the rate hikes aren’t “the end of times” for the real estate market, he adds. Rather, they have restored historical normality.

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“So the drop in sales that we saw from June through mid-August was a return to seasonality that hasn’t happened since the pandemic began.”

In August, buyers bought 1,809 homes in the greater Edmonton area, up from 2,055 in the same month last year and 2020 when 1,874 homes were sold.

Both were unusually active months, notes Soper.

Before the pandemic, 1,566 sales were made in August 2019 and 1,678 sales in 2018.

While last month’s activity has been in line with historical trends, it remains a sharp decline from March, when a record 3,283 transactions took place.

Average prices have also fallen since March when the average price reached $415,000. In August, that figure was $377,000.

“The housing market has slowed significantly, but how much is driven by borrowers’ perceptions that ‘rates are going up, so I’ll wait and see what happens?’ says Edmonton Mortgage Broker Marc Crossman, Managing Partner at Alberta Mortgage Professionals.

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However, borrowing is unlikely to be cheaper than it is today. He points to the base rate, currently 5.45 percent, to which many adjustable-rate mortgages are discounted. In March, the rate was 2.7 percent.

Rate hikes, in turn, affect variable-rate mortgages more than fixed-rate mortgages, whose rates are driven by bond market yields that anticipate central bank rate hikes.

This has led to significant cost differentials in recent months.

Crossman notes that a $400,000 home with a five-year down payment and a five-year fixed-rate mortgage at 3.39 percent would have had a monthly payment of $1,950 in March. Today, the fixed interest rate is 4.54 percent with a monthly payment of $2,196 — a $246 difference.

On one variable, however, interest rates are much higher today at 4.55 percent versus 1.55 percent in March, resulting in a monthly payment of $2,208 versus $1,590. That’s a difference of $618.

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“The amount you can qualify for has also changed,” Crossman says, referring to the federal stress test, which ensures borrowers can absorb future increases.

“Before the hikes, the qualifying rate was often 5.25 percent.”

Today, most borrowers must qualify at their current interest rate plus two percentage points, which is higher than the Bank of Canada’s benchmark five-year fixed-rate mortgage at 5.25 percent.

Borrowing costs are expected to rise more sharply this fall, albeit to a lesser extent, as another Bank of Canada forecasts a 25 basis point hike in overnight funds.

For many, it’s an indication that rates could soon plateau, Soper says.

“That probably won’t be enough to push prices back up, but it will likely keep prices in place.”