The Bank of Canada Kept Interest Rates The Same in March 2023… What Will Happen in April?
The Vancouver real estate market has experienced significant fluctuations in recent years with pressures from the pandemic, interest rates, inflation and low inventory being the primary contributing factors. The Government and Bank of Canada (BOC) play a significant role in shaping the real estate market in Vancouver as their policies affect overall market health and interest rates.
In 2020 and early 2021 real estate prices in Vancouver were rising at an unsustainable pace due to very low interest rates and market hype. Typically, the lower the interest rate, the easier it is to obtain a mortgage. High demand, low interest rates and low housing supply led to increased prices and panic buying, making Vancouver one of the most expensive cities in Canada. Some who could afford to do so even purchased multiple properties in order to cash in on the historically low rates thus, making Vancouver even more unaffordable for the average buyer.
The Bank of Canada Increased Rates Substantially from 2022-2023
To slow inflation and the out-of-control housing market, the Bank of Canada steadily increased Interest rates over the past year from 0.5% in March 2022 to 4.5% in March 2023. With interest rates significantly higher, individuals are finding it more challenging to obtain mortgages. This has reduced the demand for housing resulting in a slight cooling of the real estate market in Vancouver. Because of a reduction in the number of potential buyers and more days on market, sellers are now willing to accept lower prices. Furthermore, due to higher interest rates and the higher cost of materials, homeowners are now having to pay more to repair and maintain their property which has led to fewer home renovations.
Bank of Canada Decided to Keep Rates Steady in March 2023
Because interest rates directly affect affordability of purchasing a property, the recent decision from the Bank of Canada to hold interest rates steady for the time being has made many homeowners on variable mortgages very happy and has made buyers more optimistic about market stability and the possibility of purchasing a home in the near future.
On top of increased interest rates, the Canadian government implemented measures to address the overheated real estate market including an empty homes/ vacancy tax aimed at increasing the amount of rentals, as well as a for foreign buyer’s tax of 20% and a recent 2-year foreign buyer ban (with exceptions for students, specific industries and those purchasing in rural areas) intending to discourage foreign investors from purchasing homes in busy urban areas when they first move to Canada.
Government Imposed Tighter Mortgage Lending Rules starting in 2021
The government has also implemented tighter mortgage lending rules, i.e., the increased stress test rate in 2021, to prevent homebuyers from taking on too much debt. The stress test requires borrowers to qualify for a mortgage at a higher interest rate than the rate they will actually pay. This makes it even more challenging for buyers to qualify for a mortgage, which in turn reduces demand for homes.
Interest Rates Play a Large Role in the Vancouver Real Estate Market
In sum, interest rates play a large role in the real estate market in Vancouver. Previous low rates led to increased demand and higher prices while the recent increase in interest rates has led to decreased demand and a slight cooling of the market. The complexity of the Vancouver real estate market is influenced by many factors and it is difficult to accurately predict anything other than the fact that the demand for housing will decrease as interest rates increase. With the Bank Of Canada’s decision to hold interest rates steady for the time being, the market will most likely stabilize and demand may rise in the coming months.
