The Impact of Interest Rates on the Local Housing Market

Interest rates highly influence the housing market. These rates shape housing demand, affordability, and overall market conditions. Understanding how interest rates affect the local housing market will help prospective homeowners and investors in Calgary make informed financial decisions. 

Interest Rates and Housing Markets

Interest rates are a vital component of the housing market dynamics because they directly affect the cost of borrowing money. The Bank of Canada sets the benchmark interest rate, influencing commercial banks’ mortgage rates. When interest rates are low, borrowing becomes cheaper, making it easier for people to afford homes. Conversely, borrowing becomes more expensive when rates rise, often reducing housing demand.

Because Calgary is known for its boom-bust economic cycles, largely driven by the oil and gas industry, fluctuations in interest rates can have a significant impact. 

Historical Overview of Calgary’s Housing Market

Calgary’s housing market has historically been volatile due to its reliance on the energy sector. When oil prices are high, employment and income levels rise, leading to increased demand for housing. During these times, lower interest rates help amplify the market’s growth as buyers take advantage of affordable borrowing costs to enter the market or upgrade their homes.

However, when oil prices fall, Calgary’s housing market experiences significant slowdowns. High unemployment rates and reduced consumer confidence lead to decreased demand for homes. While low interest rates during these challenging times make it easier for buyers to afford homes, the overall economic outlook remains critical.

Current Market Conditions and Interest Rate Trends

Currently, Calgary’s housing market is experiencing a resurgence. However, the Bank of Canada’s decision to raise interest rates in response to inflationary pressures has raised concerns about the housing market’s future.

Higher interest rates have made mortgages more expensive, limiting the borrowing capacity of many prospective buyers. This demand reduction can lead to slower growth in home prices or even a decline, as fewer people can afford to enter the market. In Calgary, these rate hikes have a pronounced impact.

How Interest Rates Affect Homebuyers in Calgary

Rising interest rates have the most direct impact on Calgary’s housing market on homebuyers’ borrowing power. As interest rates increase, monthly mortgage payments rise, reducing the amount of money buyers can borrow. For example, a 1% increase in mortgage rates can reduce a buyer’s purchasing power by up to 10%. Many prospective homeowners may be priced out of the market or forced to settle for less expensive homes.

Rising rates also affect existing homeowners looking to refinance their mortgages or renew their loans. In an environment where interest rates increase, homeowners face higher monthly payments when they renew their mortgages, especially if their original loans were secured at lower rates.

These changes can be particularly challenging for first-time homebuyers in Calgary. The city’s relatively lower home prices compared to markets like Toronto and Vancouver offer some reprieve, but the rising cost of borrowing could still make homeownership out of reach for many.

The Effect on Real Estate Investors

Interest rates also significantly impact real estate investors. Investors often rely on leveraged capital to finance their purchases, meaning higher interest rates increase the cost of holding investment properties. Increased rates can lead to reduced profitability, especially in rental markets where rent prices may not rise at the same pace as borrowing costs.

Higher interest rates may also create opportunities for investors, particularly in distressed markets where reduced demand from home buyers leads to lower prices. Savvy investors with access to capital or favourable financing options may find opportunities to acquire properties at a discount during reduced-demand periods.

Broader Economic Implications for Calgary

The impact of interest rates on Calgary’s housing market extends beyond individual buyers and sellers. The housing market is closely tied to the broader economy, and changes in home prices and sales volumes can influence local employment, construction activity, and consumer spending. In a city like Calgary, where the economy is already subject to fluctuations in the energy sector, interest rate changes can either exacerbate or alleviate economic instability.

Homeowners, prospective buyers, and investors must account for the influence of interest rates on the housing market. Calgary’s housing market, shaped by both global and local factors, will continue to evolve with changes in interest rates, making it a dynamic and complex landscape to navigate. Don’t know where to start? Reach out to a Benchmark Realtor today!