Announcer (00:01):
In the night, no fires or anything of that kind. There we go again. Another planes come over.
Nicole Lopez (00:10):
This month marks the 80th anniversary of D-Day, the Allied Invasion of the 50 miles of beaches of Normandy in northern France
Announcer (00:25):
Right over our port side.
Nicole Lopez (00:27):
It was an ambitious assault and one that proved to mark a pivotal turn for the allies in World War II.
Announcer (00:36):
There we go. They got one
Nicole Lopez (00:43):
D-Day,
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Also known as Operation Overlord landed 156,000 brave souls on the shores of the beach, of which 4,000 were killed by the enemy through gunfire and landmine riddled beaches. The sheer size of the operation was unheard of at the time and included coordinated naval, air and land units within days of June 6th, 1944, the actual D-Day, about 326,000 troops, 50,000 plus vehicles, and about a hundred thousand tons of equipment had landed. I am grateful for the courageous men for their service and sacrifice grateful for the freedoms we currently enjoy because of it. Operation Overlord was a carefully planned military operation that required impeccable coordination, timing, and clear objectives in order to succeed. These men demonstrated a grit and perseverance we can learn from today. History is a great teacher and there are parallels we can draw from having a strategy, understanding the importance of timing, having the best tools available, and understanding the impact of executing our plans and pivoting as needed.
(03:00):
Hello everyone and welcome back to Real Estate with Nicole. I'm your host Nicole Lopez, and today we're diving into a topic that has probably been on the mind of most adult Canadians. What's that? The Bank of Canada interest rates and the recent drop and what its implications are for the real estate market and affordability. In today's episode, we'll be discussing the implications of interest rate changes for buyers, sellers in the real estate market, and also provide some insights on how to navigate the changes. Whether you're a first time investor, you're thinking about selling your property or just interested in the real estate landscape. Stay tuned.
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First, let's talk about what's happened. As a brief background, the Bank of Canada sets the benchmark interest rate, which influences the cost of borrow money across the country. Lowering this rate typically makes borrowing cheaper. Let's take a look back to see what the interest rate was in the past few years. In 2019, near the end of the year, we were sitting at 1.75% benchmark interest rate from the Bank of Canada. As we got into the pandemic situation, interest rates dropped significantly. We dropped two rates of 0.25%. However, in March of 2022, we started to see a rise in interest rates. It rose from 0.25% up 25 basis points to 0.5%, and it continued to steadily rise throughout 2022 and ended the year at 4.25% into 2023. The Bank of Canada continued to increase these interest rates. We ended off at 5.0% in July of 2023.
(05:34):
So as you can see from the period of the pandemic into early 2022, we saw a period where borrowing money was cheap. We saw people understanding and realizing, oh, this is a pandemic. I need to stay home. Maybe I need to buy a property. Maybe I don't need to live in the city. Maybe I can sell my condominium and move outside of the city limits since I'm working from home. With that, you saw a significant increase in activity in the real estate market people were buying. There was a very high demand for purchasing real estate because of the demand. There were lineups for showing homes or open houses. There were 50 offer bidding wars that were happening and homes were selling within days of coming onto the market. So there was a huge demand and not as much supply. In addition to this demand with regards to people realizing, oh, maybe money is cheap to borrow, I can get a mortgage for at a low percentage, I can afford this.
(07:02):
However, as interest rates rose and people who bought say in 2020 and needed to start to renew their mortgages or renew their terms on their mortgages, the cost of borrowing was significantly higher, and many individuals are feeling the pinch or currently feeling the pinch of higher mortgage payments. In some cases, individuals may have been paying $1,300 a month three years ago, and they're now paying $3,000 a month. So that's why interest rates are a key factor on the minds of a lot of individuals in Canada and the GTA at this current time period. Another factor to consider with regards to the rising interest rates. During this period of time, through 2022 and into 2023 to current, the Canadian economy saw hot inflation. So inflation was rising, the cost of goods was increasing, and we saw it at the grocery market or at the pump when we were buying gas or in the stores.
(08:18):
When we were buying goods. We saw the significant increase in cost. Our dollar was not going as far as it did previously. As a result, the Bank of Canada felt that it was necessary to slow the economy down, to bring down the inflation, and one of the tools they used was increasing the interest rates. So now fast forward to June 6th, the Bank of Canada decided to lower the interest rates by 25 basis points. It now sits at 4.75%, and again, this is the first cut that we've seen since March of 2020. The Bank of Canada, CEO, TIFF MLA stated, we've come a long way in the fight against inflation and our confidence that inflation will continue to move closer to the 2% target has increased over recent months. So personally, I think it's a move in the right direction and it's very encouraging. However, this cut won't necessarily revive the economy overnight.
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Let's look from a buyer's perspective. When the interest rates drop, the mortgage rates from the financial institutions usually follow suit, and thus it makes it cheaper to borrow money to purchase a home. In turn, we'll lower the monthly mortgage payments. Essentially, you might be able to afford a more expensive home or save money on the one you're already living in with refinancing. So this can be particularly advantageous to first time investors who are more sensitive to monthly costs. A lower interest rate can make the difference between qualifying for a mortgage and not being able to qualify for a mortgage. So that's something that we saw in the past year where individuals who were contemplating getting into the market in 2020 and 21 because of the low interest rates, they were able to qualify for purchasing a home. However, due to the increasing the gradual increase in interest rates over 2022 into last year, the ability to qualify for a home diminished over that period of time.
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However, it's important to remember that while lower interest rates can make home ownership accessible, they can also lead to increase competition in rising home prices as more people are able to enter the market. So essentially what we've been seeing is as the interest rates rose over the period of 20 22, 20 23, we saw that more and more home buyers were coming out of the market. We saw there was a hot market with lots of bidding. Now we're seeing in the greater Toronto area less bidding. We do still see it with highly desirable homes in areas that are highly desirable. We do see bidding occur occasionally, however, you do not see 10 20 offers coming in. It may be one, two or three offers, but there is significant bidding as people are able to qualify within a particular price range and they can afford that home. You may see bidding still occurring, so the competition is still there.
(12:07):
There's still demand. However many people are still on the sidelines because even though there's a 25 basis points drop, some individuals, many individuals may still be on the sidelines with regards to affordability for qualifying for a home. So for investors with existing mortgages, depending on what your interest rate is, it may be a good time to start considering refinancing and looking into your options on what refinancing terms you can apply for or what free financing terms you can qualify for. Ultimately, you want to use the best tools and the best information working with a mortgage broker or your financial institution to obtain the best option for you to help you save money while you're still able to maintain your investment. Let's switch or focus our attention now on sellers. The drop in interest rates can also have a significant impact on sellers. So when borrowing money becomes cheaper, as I mentioned before, more buyers will more likely be entering into the marketplace.
(13:25):
Again, increasing demand. It could be good news for you in terms of quicker sales and potentially higher prices, so instigating more seller's market. However, on the flip side, if a lot of individuals are looking to sell their home at the same time, you will have much more supply in the market and therefore much more competition within sellers in the market. Therefore, that would tend to balance out the prices. As we're seeing right now, there's more properties that are coming onto the market, and again, as I mentioned, bidding wars are still happening, but not as frequent and not as many bids as we've seen in the past couple of years. So it's important for you as a seller to be strategic about when you list your home, how you price your home to take full advantage of the current market conditions. So having the right tools such as a real estate professional to assist you with that is essential.
(14:46):
In addition to having an appropriate lawyer, having an mortgage broker, really understanding what your situation is, what your goals are, and what you want to do, because ultimately once you sell your home, you are also going to be a buyer if you are going to be reinvesting in the market. Now, let's take a look at market dynamics and the long-term considerations with regards to interest rates. So historically, low interest rates cannot last forever. So as an example, the data I provided you earlier, 2019 into 2020, early 2022, we saw these extremely low interest rates, and it wasn't anticipated that this was going to last forever. However, it did gradually increase over time, and the rate hikes definitely impacted affordability for many individuals. As many individuals, about 50% of the people who purchased within this time period will be refinancing, anticipating refinancing between 2024 and 2 20 26.
(16:07):
So it's critical and important for you to understand that. So whether you're a buyer or seller, investor, it's important to plan for potential interest rate increases down the line, and considering the type of mortgage that you're obtaining, whether it's a fixed mortgage, a variable interest rate, mortgage, really understanding what the implications of each type of mortgage that you are considering and understanding your risk tolerance, your financial situation, and any mitigating strategies that you might want to put into place. For example, if you had taken a low interest rate mortgage and it was a variable rate, having a plan for your tolerance on rate increases over time, and knowing when and what strategy you might want to take if the rate reaches a certain threshold, whether you would decide to lock in or whether you would decide to refinance, just making sure you really understand your options for potential scenarios.
(17:20):
Furthermore, the overall economic environment also plays a crucial role. So it's not just interest rates that people should be really focusing on. Factors such as the employment rates, wage growth, population growth, we've seen over the past few years, 1.5 million new Canadians come into the country more than was originally anticipated. So this puts a lot of pressure not only on home buyers, but also on the rental market. So all of these factors, they will interact with the interest rates to shape what happens in the housing market. So it's important for you to understand these dynamics, stay informed and flexible with regards to navigating these changes as they occur.
(18:17):
So as I mentioned before, most of us are focused on the interest rates dropping. However, those other factors that I mentioned also can influence our decision making. So having a clear objective and a goal related to your real estate investment, understanding the real estate landscape, understanding what you need versus what you want, having a clear idea of what you can afford. So affordability is a factor that I cannot emphasize enough, really, truly understanding your numbers. What I really highly recommend that you speak with a CS in the mortgage broker. Yes, you might have your financial institution, but it's always good to speak with a mortgage broker who is investment savvy, who's strategic, and who can provide you with help you walk through a strategic plan for your particular situation and goals. In terms of learning from operation overlord strategist, timing is another factor, though we cannot predict the real estate market, you can learn from trends.
(19:36):
So I recently looked at some footage from the 1980s. In the 1980s, you heard people being interviewed saying, oh, no one's ever going to be able to afford to buy a home again, these interest rates are just too high. It's unbearable. Oh, we can't even think about luxury. We just got to get something we can afford. This was pervasive throughout the early eighties into the eighties where interest rates were so high, everybody was feeling hopeless. However, if you fast forward 40 years later, we're kind of in the same situation. Interest rates aren't double digits like they were in the eighties. However, the prices of homes are much more significantly higher. However, we're in a similar kind of situation where the thinking is something is impossible, but we need to see the bigger picture and back out a little bit and see where we really are and understand that this is a trend and trends ebb and flow, and we can learn from the past in order to help us make decisions in the future.
(20:54):
Probably the most challenging of learning from Operation Overlord is the follow through, getting onto the beachhead and executing against the plan. This is where having some flexibility and understanding the market dynamic will help you in navigating the challenging landscape and ultimately to help you achieve your goal. Again, you may need to make stepwise progressions rather than taking one large leap. Be adaptable, be resourceful, persevere in the face of adversity. I know everybody wants to have their freehold detached home. However, sometimes we need to start where we can afford being able to get into the market, into the real estate market to build equity on that property, and then ultimately take the equity from that property when we sell it and take the next step. Maybe our next step is a town home, and then after that, maybe our next step is our forever dream home, but really taking a step back and seeing what is it we want to achieve. And sometimes it's not in a straight line. Sometimes we need to go around the corner a little bit in order to get to our ultimate goal. Thank you for tuning in to today's episode of Real Estate with Nicole, and I hope you are able to glean valuable insight to help you make informed decisions in the real estate market. If you enjoyed this episode, please subscribe, leave a review, and share it with one friend or family member who might benefit from this information. Until next time, this is Nicole Lopez signing off. Stay informed, stay proactive, and take care.
