Rising Interest Rates Will Cool Vancouver House Prices

The anticipated increase in interest and mortgage rates over the next year or so will result in a house-price reduction in Canada’s most active real estate markets –Toronto and Vancouver, according to BMO Nesbitt Burns.

In a North American Economic Outlook published November 13, senior economist Sal Guatieri writes, “While other regions have steadied or weakened this year, notably Atlantic Canada and Quebec, these three cities have strengthened, with sales well above year-ago levels in response to strong demand from immigrants and millennials. Prices have accelerated faster than family income, further straining affordability.

“Consequently, some correction is anticipated in Toronto and Vancouver when interest rates eventually rise.

Guatieri cites the example of a Toronto property and what could happen to its price with interest rates rising.

“As a rough guide to potential price declines, if interest rates rose two percentage points in the next three years (while income continued to trend higher), the price of a Toronto bungalow would need to decrease 11 per cent to maintain mortgage service costs at current levels for the typical buyer.

The economist concludes, “While supportive demographics and an influx of foreign wealth should cushion the blow, it’s difficult to see prices staying at current lofty levels if interest rates don’t stay at current crisis levels.”

The report follows on the heels of Guatieri’s October outlook, which said, “Vancouver and Toronto are vulnerable to a severe correction in the event of a recession or spike in interest rates—a risk that builds the longer that prices outrun income.” 

- See more at: http://www.rew.ca/news/rising-interest-rates-will-cool-vancouver-house-prices-bmo-1.1584972#sthash.sbgGoB03.dpuf