Rate Hikes Hit BC’s Hot, Hot Housing. What’s Their Cooling Effect?

In March, Chris Cheung and I started our weekly look at B.C.’s painfully hot housing market — a series that comes to an end today. And things certainly are different compared to just six months ago when we began.

Home prices had been on a tear across the province, boosted by a surge of surprising pandemic demand. It was almost exactly the opposite of what economists had predicted: instead of home prices falling because of economic uncertainty, demand surged, especially for suburban and rural homes.

As the COVID-19 pandemic entered its second year, global economic disruptions pushed up the price of, well, pretty much everything: groceries, gas, bikes, cars. The Bank of Canada acted to put the brakes on inflation, which had risen by eight per cent — a rate not seen in 40 years, the Bank of Canada said this July.

Inflation has also made it more expensive to build new housing, with construction costs rising by around 25 per cent in the first three months of 2022 compared to the same period last year.

Low interest rates have juiced North America’s economy for the past two decades, and they’re what made owning a home possible for many people. By contributing to homeownership demand, low interest rates also helped to push up the price of homes throughout those decades, especially in notoriously hot markets like Vancouver and Toronto. Many experts warned low interest rates had become a trap: they made it possible for people to afford a home, but also pushed prices beyond the reach of many potential homebuyers.

Now the Bank of Canada has raised interest rates, and that’s provided a shock to especially heated real estate markets as mortgage rates have gone up. People who recently bought a home in Metro Vancouver with a variable-rate mortgage may now be paying as much as $1,500 more on their monthly payments, said Steve Saretsky, a Vancouver-based realtor. (The benchmark price for a home in the region is now $1.2 million.)

The result? A super hot real estate market has now cooled dramatically. Prices are falling and listings have dried up.

“This will probably be the largest correction Vancouver will have going back to the 1980s,” said Saretsky, referring to a period in that decade when homeowners experienced double-digit mortgage interest rates. Just like today, the Bank of Canada had cranked up interest rates to douse soaring inflation. (If you’re too young to remember the 1980s, check out this handy history lesson published by the Globe and Mail in 2015.)

Does this mean housing is now affordable in Vancouver? Regular real estate watchers might have already guessed the answer: not a chance. While home prices have been falling, that decline has only started happening in the last few months. Prices have been dropping to levels last seen a few months ago — and those prices were already very high and disconnected from local income levels.

“To get back to sort of January's levels of quote-unquote affordability, prices would have to drop about 25 per cent,” Saretsky said. “And I wouldn't say January was affordable.”

Vancouver home prices have a tendency to recover relatively quickly after shocks like the 2008 financial crisis, or the policy measures introduced in 2016 and 2017 to curb demand and real estate speculation after a historic price upswing destabilized the housing system.

With B.C.’s current tight labour market and rapid population growth (the province added 100,000 people in 2021, the highest population bump in 60 years), economist Bryan Yu expects demand for housing to increase over the next few months. While property buyers were attracted to suburban and rural properties during the pandemic, he expects to see demand start to shift back to urban areas.

Renters have also been affected by rising inflation, Yu said.

“We're talking about around five per cent year-over-year growth in rent currently,” Yu said.

“Interest rates and inflation play a role in that as you constrain the ability to people to get into homeownership, they ultimately end up somewhere — they have to find rental accommodations.”

That can put huge pressure on lower-income renters, so now the B.C. government is scrambling to ease the blow of high inflation.

In 2017, the BC NDP government moved to cap annual rent increases at just the rate of inflation, rather than the previous two per cent plus the rate of inflation. But with that rate coming in at 5.4 per cent this year, government is preparing to step in to set the annual allowable rent increase at a lower point (the actual rate hasn’t yet been determined).

So where does that leave British Columbia’s housing system?

Saretsky warned that there are three groups of homebuyers who are particularly vulnerable to rising interest rates. People who got a mortgage from a private lender may face demands to pay more money to bring the loan-to-property-value-ratio in line. Prospective condo buyers who bought a pre-sale assignment may now find it more difficult to qualify for a mortgage to actually complete the purchase when buildings are constructed. And homebuyers who have a mortgage with a “trigger rate,” now commonly offered by most large banks, will face demands from their lender to increase their monthly payments.

“The banks are going to come to you and say, ‘Hey, listen Steve. We signed you up at 1.5 per cent but today's market rate is like four per cent,’” Saretsky said.

“Your current payments aren't paying any principal down, so we need you to increase your monthly payment so you’re paying a little (of the principal) down, and it's not an interest-only loan.”

It’s not going to be a financial “doomsday,” Saretsky said — one-third of Canadians own property without the help of a mortgage. But there will be pressure on some of those specific homebuyers. He predicted that policy-makers will look at bringing back longer mortgage amortization periods. Forty-year amortizations were offered prior to the 2008 financial crisis, but were phased out because of fears the practice could lead to a housing market meltdown.

And while prices have fallen, buyers will likely adjust to the new higher-interest rate environment. Prices in B.C. are just too out of whack to begin with for even the radical step of increasing interest rates to make much of a difference to the average income-earner in this province.

That means governments are going to have to continue to tinker with policies to try to even the scales of B.C.’s brutally unequal housing market, which has made some residents very rich, caused others to give up on ever owning a home, and pushed still others into homelessness. It’s a problem that got worse over the course of the pandemic, as property prices rose quickly while tent cities grew in both cities and small towns.

Both the federal and provincial governments have been trying to build and fund more affordable housing over the past five years, and Yu said governments need to keep up the pace of that new housing supply.

“Sometimes the market doesn’t build out all the housing or affordable housing,” he said. “I think there is a lot of need for social housing, as well as market housing.”

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Hot, Hot Housing reported on the housing crisis every Friday from early March to the end of August 2022. While we're wrapping this column, we'll be continuing to report on housing — in particular as we gear up for this year's municipal elections. So if you've got housing stories of your own, whether they're market hijinks, tenancy horrors, survival strategies or election tips, you can email them to us at [email protected].