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Interest Rate Fallacy

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Why are the increasing interest rates NOT cooling the housing market?

  • Photograph of Nancy Smith
  • Qualicum Beach REALTOR®
  • Published: Aug 28th, 2023 at 10:50 am

Let us look at the simple facts, without trying to be economists.

1) How is increasing interest rates helping first time and low income earner to buy a home?

2) Why would home builders and developers risk building homes when they are facing unknown interest costs, because there appears to be no end in sight for a stable long term rate. Home building can take up to a year or two and is often financed by a builder, at the base rate plus. An increase of 2% over a year is an expensive proposition for a builder.

3) Not only have prices climbed drastically over the past three years 'due to inflation', but purchase prices have not dropped either, so buyers are facing an uphill battle to buy when their financing costs and affordability ratios are constantly increasing.

4) Cash buyers have been dominating the markets for the past five years, due to the trickle down effect of home selling and subsequent purchasing. People who do not have mortages on their 10 - 20 year old homes need only to dip into their savings to move in the market. Often these cash buyers and bidding up home prices and are making subject-free offers.

5) In addition to market issues, we have also had an incredible series of natural disasters, wiping out homes, due to flooding and forest fires. Rental markets have been tight for the past 14 years, and the lack of motivation to build new rentals has placed homeowners in the precarious postion of not having transitional housing. Without the chance to rent a home while shopping for a replacement or building, is forcing sellers to abstain from entering the market, thus decreasing home listings supply.

In effect, it seems every time the Governments attempt to assist in the home owning or rental market, the results seem disasterous. There are no simple one-step solutions when our Governments try to take shortcuts to solving problems. It has long been stated that increased rules and legislation just increases the complexity of home-ownership with the accompanying increase in costs. Just increasing interest rates does nothing for builders, developers, homeowners and industry, and will do nothing to decrease inflation.

Band-aid solutions only cover up the broken fundamentals of our housing crisis.

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