How Thompson-Okanagan housing markets may react to rising interest rates
Housing sales fell by 35% in B.C. in May compared to May of 2021.
But, that’s just business as usual in the real estate world, according to Brendon Ogmundson, chief economist for the B.C. Real Estate Association.
“We were going to have home sales lower anyways this year because we set a record last year,” he told iNFOnews.ca. “It’s unlikely it’s going to be repeated. But we’ve seen home sales fall a little faster and little sharper than previously expected because rates have gone up so quickly and have reached such a high level.”
The Bank of Canada overnight lending rate rose to 1.5% from 1% on June 1 and is expected to go higher, maybe as early as July 13 when the next rate announcement will be made.
While sales dropped 35% in B.C. in May, they were only down 28.5% in Kamloops and 28.4% in the Okanagan.
“Some markets were really strong to start the year,” Ogmundson said. “The Okanagan had a really strong first three months and the levels of sales in May was right on the long run average. Kamloops was essentially the same.”
READ MORE: Month-over-month drop in real estate prices in Okanagan and Kamloops
Particularly in the Okanagan, demographics are working in favour of a strong resale market for homes as there are a lot of millennials and baby boomers living or moving there.
“Just because of demographics, that area is going to continue to have a lot of demand from one end of the population age spectrum to the other,” Ogmundson said. “All those 30 year olds are going to need homes and a lot of retirees are looking to relocate to the Okanagan so there’s going to be a lot of demographic support for demand. We have high interest rates but at the same time, demographics are really strong in support of the housing demand. I think that will set the floor on how weak the market can be.”
Kamloops may not have the same attraction as the Okanagan but that market has held up very well, partly because it’s more affordable, he said.
The B.C. Real Estate Association forecasts sales to fall by 25% this year and another 20% in 2023 for B.C. as a whole.
For the Okanagan, that looks more like a 19% decline this year and 15% in 2023.
Those projections were made before the latest 0.5% increase in the Bank of Canada’s overnight rate on June 1.
READ MORE: Is Kelowna running out of room to grow
It’s expected that the Bank of Canada rate will continue to climb.
The Bank of Canada’s goal is to hold interest rates below 3%. If they go to 3.5% – meaning another 2% above the current overnight rate – that could push mortgage rates to 5% and the stress test will have to prove you can handle a mortgage of 7%.
Already, at an average of 4.49% for a five-year fixed mortgage, that’s the highest rate since 2009, he said.
“The question I have is, how long are we there for if we’re going to have a 3.5% overnight rate and a 7% stress test rate?” Ogmundson asked. “Can the economy handle rates that high and are we going to get to that rate or is the Bank of Canada going to start cutting rates late next year or in early 2024 amidst fears that we’re in a recession?”
If inflation comes down faster than expected or there are job losses that signal a recession, that rate could stay relatively low or come down sooner, he said.
One counter to higher interest rates is the fact that, during the two years of the pandemic, Canadians' savings grow by as much as they did in the previous eight years. That means Canadians have a “liquidity buffer” against debt levels that’s six times higher that it was pre-pandemic, he said.
“If you strip away the weird pandemic stuff, we have a market that’s pretty normal,” Ogmundson said. “We’re seeing sales come down from record highs. We’re seeing mortgages react as we would expect them to react to interest rates. Generally markets are functioning the way they’re supposed to.”
There are so many factors at play right now – with high inflation, the Russian invasion of Ukraine, supply chain problems and COVID still lingering – that it’s hard to predict what’s going to happen.
“There’s all these very weird things because of the pandemic and issues related to the pandemic that make it really cloudy but you just have to concentrate on the nuts and bolts of the housing market.” Ogmundson said. “This is the way markets are expected to react to high interest rates. In that sense, it’s kind of normal."
All that, of course, has to be taken with some caution.
“There’s a lot of really unusual things around,” Ogmundson said.
To contact a reporter for this story, email Rob Munro or call 250-808-0143 or email the editor. You can also submit photos, videos or news tips to the newsroom and be entered to win a monthly prize draw.
We welcome your comments and opinions on our stories but play nice. We won't censor or delete comments unless they contain off-topic statements or links, unnecessary vulgarity, false facts, spam or obviously fake profiles. If you have any concerns about what you see in comments, email the editor in the link above.
