Higher Interest Rates, Lower Housing Prices?

As rates rise, mortgage payments increase.  It’s a contributing factor to surging home sales across the country:  buyers don’t want to lose out on their low <3% rate holds.   But what happens when that pulled-forward demand has ended?

The following excerpt is from Scotia Economics Global Views released today:

The question facing Canadian housing is whether recent resale strengths are sustainable, or temporarily brought forward and risking a later curtailment through the exercise of rate commitments that are being repriced higher.

The chart shows mortgage payments and house prices under the pre-rate shock environment in the Spring versus the higher rate environment now versus the blue bar that captures what would happen if the full cost of funds shock were to be sustained across the industry and hence fully passed on. This payments shock is coinciding with a slowdown in job growth this year (Source)

Scotia: Mortgage Rate Shock

Do you think the average Canadian house will fall in price by ~$30,000 due to higher interest rates?

Related post: What impact will rising rates have on housing?

One response to “Higher Interest Rates, Lower Housing Prices?

  1. Hi Mike,

    No. I think that much bigger shift will happen. As people start to understand the relationship between low interest rates and prices of house first hand (I think that personal experience is the most important factor) and learning second hand from the stories of others, their perception of the market will shift accordingly and probably swiftly. The bank analysts are linear thinkers in a complex world with feedback loops which are hard to model. How do you model trust? You can’t so they just model what they can model. It is a good thing they are not building bridges.

    An example of non-linear event is the NSA spying – the trust people have is strong and resistant to revision but once it breaks, it does so almost at once. There is lots of trust in the housing market among people today as is clear from daily stats. Pulling forward demand and creating a vacuum can really spook people.

    People don’t think about the housing market all that deeply – they just look around and do what other people do and feel like they belong into the same club – can’t blame them really with having to live a life and all.

    Thanks for reading this and take care. Len

    P.s. The one big contribution that you made towards transparency of the housing market – the details of daily sales – is gone. It is rare to find the raw data without spin and available to all who want to inform themselves. Not sure if posting it was too time consuming or the cartel has made demands on you but it is a loss to transparency and it is too bad. I am not very interested in particular communities, more in overall (sobering) trends that can be discerned from data.

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