Cold Markets, Supersize Rates Hikes...

"Canadian inflation expectations bolster case for supersize rate hike" - Reuters (link to the article below)


When you see that headline, you might feel the little hairs on the back of your neck start to tingle. I have very little hair these days but I know that is what I thought first reading that article.


But is the rate hike of 75 basis points a massive shift in our real estate market? Considering the activity this month, maybe not.


Let me explain.


Our real estate market is heavily reliant on the interest rate market, without question. But as we have seen when the first BOC rate increases were announced, our market also reacts quickly to change with activity reacting and changing to different segments.


This can be evident in our most recent absorption rate analysis.


Aggregated Absorption Rate - All Calgary Segments

This month we continue to see further declines in the activity of sales in the Calgary area. Dropping 6% from last month, we are currently sitting at a 50% absorption rate of listing sales.


This means that rather than seeing nearly 9 out of 10 homes sell in a month as we saw in February and March of this year, we are now seeing 1 of 2 homes sell.


This decline is caused by two competing factors. The first is the number of listings increased month over month by 5% while sales declined by 7%.


As opposed to earlier this year when we had the opposite effect, the number of active listings is now outpacing sales as we start to recover to more balanced inventory levels.


When we look at the apartment rates, we see a very similar picture.


Apartment Absorption Rates - Calgary

In the month of June, we saw the number of listings increase by 11% while the number of sales decreased by 2% dropping our absorption rate from 43% in May to 36% in June.


A buyers market is usually determined to be the current market status when the absorption rate drops below 40%,


Because just over 1 in every 3 apartment listings is selling currently, this is the first market to start showing signs of prices starting to fall.


The different segments' price changes can be found below:


Median Sold Prices Per Segment

Segment

Detached

Attached

Townhouse

Apartment

Price ($)

590,500

485,000

345,300

246,500

M/M Variance

-1%

0%

-3%

-3%

The median prices of all segments of the Calgary market saw declines month over month in June. With apartment condos and townhomes leading the decline with a 3% decline compared to last month, followed by the detached segment dropping 1% and no change in the attached (semi-detached) segment.


These types of price changes are understandable as it is directly correlated with the inventory levels of each of these segments along with the cost of borrowing for the price point.


Apartments and townhomes are in higher supply due to the number of homes available in these segments as well as the number of new construction projects associated with them. Whereas the attached and detached segment will see smaller declines as their inventory levels still remain low.


But the question on everyone's mind is how the new rate changes will affect the real estate market heading into the summer months.


We will take a bit of a dive into this question below.


75 Basis Points - Is It Really That Bad?


If you read the article above, it might sound that way. But I'm here to tell you, even with this increase, the cost of borrowing is significantly lower than in prior eras when a recession was triggered.


I'm constantly reminded by my older clients that the rates in the 1980s were 18-20% and they were only allowed to lock in for one year at a time with the banks because of the amount of fluctuation.


Currently, we don't have this problem. Those that were savy and locked in historically low rates last year are okay for the next four years. And for those that are buying or refinancing now, you are still able to get rates as low as 3% on the variable and around 4.9% on the fixed.


But will this continue to cripple the real estate market? The short answer is yes.


But the long answer makes more sense.


All of today's buyers are qualifying at the stress test of 5.25% or 2% higher than the contract rate. Therefore, any rate increases that do occur do not affect a buyer's ability to qualify for a mortgage. What it does affect is how much that buyer is willing to spend that keeps them in line with their budget.


This is why we are seeing price declines in detached homes, but attached homes are remaining consistent. They are at a lower price point and are more appealing for buyers that might qualify for a detached home, but with the higher rate, are choosing semi-detached.


The effects of the rate increases in the real estate market are there, don't get me wrong, but it's no longer the driving force for the declines.


As we can see with the historical trend of 2021 (when rates were at their lowest), the summer months are still when significant declines in the activity of the market happened.


This is due to seasonality and homeowners just enjoying the summer months.


We will continue to see this trend this year and I would expect as we have seen in years past an uptick of activity into the fall. By this time, who knows, the BOC might be clawing back rates and the inflation numbers might start to become more in line with the targets the BOC has. If this were to happen, different economic factors like oil prices and migration to our city will determine how our real estate market will react.


Thank You!


As always, thank you so much for your time to read this article and check out my content. I truly appreciate it. You can check out my social channels, my Google reviews, or join my email list for instant access to these articles and so much more.


I appreciate your time and I hope you have an amazing July and Stampede!


Reuters article link - click here

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