Home Month and Year February 2024 Mortgage Rates vs. Real Estate

Mortgage Rates vs. Real Estate

The resilient Calgary market


While the direct impact of spike mortgage rates on Calgary real estate can get complicated and a bit tricky, some analysts and experts suggest that it is a matter of simple math and consumer confidence.

“Each rate hike has the effect of reducing borrowing capacity and how much potential borrowers can afford to borrow,” explains CMHC’s senior specialist and market analysis, Taylor Pardy. “There are various factors in play. It can depend on income, size of down payment already saved up and pricing in the market, rate hikes can have the effect of potentially delaying purchases in the short-run for existing and new homes and can cause some people to remain in the rental market longer.”

In the tricky math of real estate, house prices and affordability combine with mortgage rates as important components.

According to Victoria Girardo, senior vice president of Real Estate Lending with Canada Western Bank (CWB), “Mortgage rates can be affected by economic factors like housing market conditions or general economic growth or decline, or the bond market. Especially in 2023, a major factor influencing mortgage rates was the Bank of Canada’s monetary policy. With the Bank of Canada’s rapid succession of rate increases, most notably the 25bps increase announced last July, the impact on mortgage rates25bps and in turn housing affordability25bps was significant.”

In mid-summer 2023, The Bank of Canada raised interest rates, hitting the economy with even higher borrowing costs as new projections suggest it will take longer for inflation to fall back to two per cent. The central bank hiked its key interest rate by a quarter of a percentage point, bringing it to five per cent, the highest it has been since 2001.

CMHC stats show that many homebuyers took out mortgages in 2020 or 2021 with historically low interest rates. The contentious Canadian ‘stress test’ meant that those homebuyers still had to qualify at a rate of 5.25 per cent or their contractually agreed rate, plus two percentage points, whichever was higher. After the recent rate hikes, those seeking to either get a new mortgage or switch lenders could be stress tested at a rate of more than eight per cent! Realtors and lending experts caution about a crunch leaving many existing homebuyers with few options, other than to renew with their current lender, where they will be able to avoid the stress test.

“The Bank undertook the hikes to curb inflation, bringing it more in line with their target rate of two per cent. Interestingly, mortgage rates are a key contributor to the headline Consumer Price Index increase, together with food prices,” Girardo notes, and adds the positivity that through the various spikes in interest rates, the Calgary housing market has shown signs of resilience, bolstered by strong employment, immigration and generally affordable housing.

“Housing prices have increased on a year-over-year basis. In general, sales have increased as well. And inventory remains low. These are all indicators of continued strong demand. Rising mortgage rates have deteriorated purchasing power, and Calgary’s housing market has shown the trend of rising demand in more affordable asset classes, which helps to keep pricing for these options – like semi-detached homes and townhomes – quite resilient.

“Today’s active buyers are having to make trade offs in the type, size, location of homes compared to  18 months ago, to qualify for enough mortgage to make the purchase feasible,” she says.

For most of last year, economists and other number-crunchers valiantly tried to explain that Canada’s central bank hikes and the spiked mortgage rates it caused were a concerted effort to cool a dangerously hot real estate market.

Girardo cites that last January, when The Bank signalled a sudden rate hold, buyers came back into the market. But it didn’t last. “With this new batch of rate increases adding to mortgage and consumer debt costs, as well as unemployment creeping up, purchasing power and discretionary income continues to erode and spending is slowing.”

Dan Eisner, founder, and CEO of True North Mortgage, points out that “The Bank of Canada felt it had to step up to the plate to hit out several rate increases and swing harder against a resilient economy. Mortgage rate hikes put budget pressure on those with variable rate mortgages, or mortgages coming up for renewal from much lower rates.”

National stats show that approximately half of all mortgages in Canada are set to renew in 2025 or 2026, due in part to the real estate frenzy that transpired during the pandemic. “Higher rates also mean it is tougher to qualify to buy a home in Calgary,” he says. “Buyers need to show that they can handle payments at a rate that’s 2+ per cent more than their contract rate to get the mortgage. For example, on a mortgage of $500,000 with a five-year fixed mortgage rate of 5.0 per cent,  a 0.5 per cent rate increase can add about $150 to a federal qualifying stress-test payment.”

The continuing stability – and relative affordability – of Calgary real estate makes the market different from other major Canadian markets.

Tracking the impact of mortgage rate spikes and crunching the numbers show that, for various reasons, the Calgary real estate market continues stronger than some other Canadian markets. Girardo says that Alberta, and specifically Calgary, is faring better than most provinces. “Facing softer commodity prices and impacts from wildfires, GDP growth will certainly be impacted but is expected to outpace the rest of the country.”

Dan Eisner also mentions a Calgary silver lining about spiked rates. “Calgary has been a national housing hot spot since about a year ago, mainly due to job and home seekers from other provinces or countries attracted to our higher-value market that can help them better qualify for and afford a mortgage.

So, 2023’s higher rates didn’t make much of a dent on the buyer’s side.

“The knock-on effects of higher rates have pushed more Canadian buyers to Calgary and away from higher priced markets, setting a mid-summer 2023 Calgary home sales record which was up 11 per cent from the previous year. For first-time buyers already here, if they look at average home prices in Vancouver or Toronto, they will know that the average Calgary price is lower by at least $450,000 (depending on the type of residence).”

For 2024, experts are still relying on educated guesswork about mortgage rates, a cool down and the Calgary real estate market’s reaction and lingering consumer jitters.

CWB’s Victoria Girardo points out that confidence in any upcoming rate decisions is varied. “Most agree that the Bank of Canada is leaving the door open to potential rate drops, should inflation numbers signal that further action is needed to curb inflation.”

There was some encouraging mortgage news, last December. While  Canadian lenders expected the Bank of Canada to lower influential interest rates this year, borrowers got a late Christmas present with lower rates on certain types of mortgages: less than five per cent on specific types of fixed mortgages.

Experts agree that the last time Canadians had five year fixed at around 4.89 per cent, was the middle of May, 2023.

Dan Eisner explains that, “Consumer confidence in the mortgage industry started to recover with the central bank’s pause and December’s five year fixed rate, but we will likely see more lower rates continue to work their way down to home buying decisions.”