The Truth About Interest Rates & Canadian Real Estate Prices 📈

[@the_ikiru]

I think one thing that people forget is that we were anticipating the first rate raise in early 2022. We expected the BoC to do it and they didn't! Prices went up in February because we knew that the rates were rising later that month "for sure". The rate increase caused prices to go up before it caused them to fall.

[@CanadaTop5]

Real estate is not as good a leading indicator as the stock market. Stocks can be traded by click of a mouse click but not real estate. Impact of Monitory policy cannot be felt until policy changes actually happens. Your charts missed that interest rate hikes were actually paused from Jan 2023 to June of 2023 and were then raised further by 50 basis point. The reason that house prices were the most in first 6 months of rate hikes was b/c BOC front loaded the hikes rather than doing it gradually. However, down path would be more gradual and hence activity and price increases would be gradual as well. Again impact of interest rates on housing doesn’t happen until the rates actually change. Also another thing to note is whats the lowest interest rate available right now. Fixed rates have been lower since summer of 2022 and continue to do till date. Prices fluctuate when the lowest available interest rate changes. If we draw a graph between lowest available IR and house prices, there is a clear co-relation with a lag of ~6 weeks.

[@baseline6786]

Yup prices fell quick at first rate cut. Will see what prices do once Spring 2025. With two more rate cut potentials.

[@ladyk1466]

I believe that most of the price decreases happened within 6 months since the first rate hike in March 2022 because the music suddenly stopped and people who had bought first before selling their home had to sell even if the prices were not what they wanted

[@Casey-qm1nd]

When people are talking about the lag effects, they are normally talking about goods and services, not assets. Asset prices feel rate changes immediately. If an asset is not responding to cuts, it's a sign of weakness (or that asset is already overvalued). I predict that in spring, we will see higher expectations and more inventory. We will see higher sales and lower prices as sellers compete for bids. I don't think buyers are going to get the crash they want, but sellers aren't really going to get their way either. The risk is more to the downside than upside. Sellers expectations will eventually catch up with economic reality as the overvalued real estate sector adjusts to higher rates. There are so many different asset classes to pick from, not just Canadian RE.

[@Samseed]

I appreciate your perspective. Thanks very much. I'm looking to buy a place in Durham early next year and I'm trying to time things a little bit. Its a bit nerve racking to consider buying a place in this market that is so much more expensive than 10 years ago. I plan to buy a house that I want to live in and have an in-law suite for the in-laws or possible rental if things get tougher. The part I'm nervous about is losing value in the house after I buy it. On the flip side, as long as its a house I like, I dont consider it much of an issue if I plan to live there a long time. I dont think prices will come down much in the next 6 months or so (although I wish they would for my sake), so I'm holding off a bit for lower interest rates.

[@kellyhou9594]

Think about how much the houses it cost 10 years ago vs now...... And think about how much it will cost 10 years later.....

[@TomStorey]

Thanks for watching. Being nervous about this market is normal. Buy within your means, try not to be emotional, focus on numbers and data. Trust your gut and buy with a long term hold strategy.

[@Samseed]

@@TomStorey Thanks! Great advice as always!

[@SuperNerd528]

nice videos, but theres a lot of voice pops in your audio. its a bit distracting

[@adamnarbeaux5898]

Tom is always right

[@denesbastos2001]

It looks to me the prices were already going down when the BOC made the rate hike announcement due to the insane increases previously. Only now we are seeing condo prices going down as investors are more sensitive to rate hikes, detached home owners will hold for longer. I would say the new mortgage measures could have more impact than the rate cuts in the short term. So if the market really pick up we won’t know the real reason

[@sohelishrat3353]

Good work 👏 keep it up, and i will call you for my house You're the right person

[@TomStorey]

Thanks for watching!

[@masterphotog4131]

Another great video, keep up the good work!

[@kimblemooney2757]

If you look at the trend line (the average since the 2022 bottom) to today the pri ces have actually moved up since the fall of 2022. Your point is absolutely correct. If you bought wisely after the fall of 2022, you probably have experienced a gain.

[@lynchmick]

I purchased a semi in Oct '22. I'm assuming my house price is somewhere between flat and negative 5%.

[@TomStorey]

@@lynchmickSeems about right. Depending on market.

[@kimblemooney2757]

@@lynchmick That is close to trend - all depends on how carefully you bid on purchasing. The point is that you likely are flat - you have not lost money. It also depends where you are - in North Vancouver you would have a gain. In Surrey or the valley flat to slight negative.

[@DummMoney-rr1fi]

Did it take over a week for the rate cut to reach TO?

[@TomStorey]

I blame Canada post.

[@ElectronicWasteland-p2x]

People are ignoring the "full effect" part of the statement. There's effects at all points during the 12-18 months, they're just not fully realized until the duration is over.

[@dwestinghouse]

Whats the catalyst that drives prices higher, govt policy? You still need the income to support that (helps top 5% of wage earners). Average costs have increased faster than wage growth, that squeezes corporate profits. Less corporate profit/ less or stagnant employment. Less employment causes negative sentament through all asset classes. This is a cycle and a headwind for higher prices. Please look at longer term trends to paint a complete picture (90's, 00, and 08). The yield curve is not predicting price growth.

[@TomStorey]

I’m not suggesting prices go higher right away. The number of sales has been very low for a while now. That will pick up first if rates keep coming down. I would hope we have a “boring” market for the next 2-3 years and avoid the major swings we’ve recently gone through.

[@dwestinghouse]

@@TomStorey Who knows where this is headed or the time line. Recovery only happens after a bottom. Bottoms can only be identified a few years after they take place.

[@datruth4766]

The idea is that when people know the rates are going down and if that is meaningful for them, why would they jump in at 50 basis points, when 250bp are coming in the future? If you waited for 50bp, you will certainly wait for 250bp. That will take 12 - 18 months. Interest rate decreases aren't relatable to interest rate increases, especially since the rate of increase was so much faster than the decrease. Its oranges and apples. Nobody is waiting for interest rates to go higher, there is nothing to wait for. People just rushed to sell before prices came crashing down.

[@littlepinner05]

While you are likely correct that rate increases resulted in price drops in 2022, I would say that you are missing from your narrative the fact that you had many functionally distressed sellers in those markets during that period, at the same time as a sentiment shift/lack of buyers, which is really what caused the initial price drops. At the beginning of 2022, most people in the GTA/Southern Ontario were buying their next property before selling their current property, since the market was so hot and prices kept going up. When the market turned suddenly in spring 2022 (due to rates/uncertainty), many sellers were effectively distressed, since they had already bought another property and needed to unload their current property. Since buyers were cautious due to the rate environment, this caused prices to drop significantly in a short period. Once that initial distress ran its course, prices stabilized. So taking that forward, what you are missing from your assumptions is the possibility of further distress in the future. I see two ways this could materialize: 1) Toronto condo market: Many condos that are being completed are underwater and there are increasing reports of purchasers not being able to close. We are seeing low sentiment for condos, which is resulting in very low sales volumes, price drops and growing inventories. With 65,000-75,000 condos completing in the next 24 months, this flood of supply, much of which is distressed could cause capitulation in all condo prices. Since condos are mostly owned by mom and pop investors, this could impact existing homeowners and the fear could spread to real estate in general over time. 2) Unemployment: Unemployment is one of the most lagging indicators of the economy. Canada was lucky in 2008-2009 that our unemployment was quite a bit lower than the US and recovered fairly quickly, so we benefited from ultra-low rates without a severe recession. We may not be as lucky this time. If unemployment spikes (and the indicators are trending that way), then there will be some distressed sellers and it could cause capitulation in the housing market at the same time as buyers are cautious (as not many people want to make a huge purchase if they are uncertain about their employment in the future). All that to say, your thesis may be correct, but you are ignoring some of the big risks to that outcome. If either of those risks materializes, as we saw in 2022, prices could drop significantly and quickly based on very few sales. On the other hand, if the economy stabilizes and neither risk materializes, then it is unlikely we would see price drops and the market would likely resume its upward trajectory.

[@TomStorey]

All solid points. Well thought out. Thanks for commenting!

[@Pseudonymoniae]

Tom, I'm not sure this analysis makes sense, as I think you're attacking an idea that doesn't make a lot of economic sense in the first place. The 18 month thing refers to the overall economic effects of interest rate changes. The actual effect of this on real estate prices will really only be through the direct effect on mortgage rates (which is immediate for variable rate, variable payment mortgages and delay by up to 5 years for fixed rate and variable rate fixed payment mortgage i.e. the majority of mortgages). Whereas real estate prices are heavily dependent on speculation and investment, supply versus demand, and cost to bring product to market, all of which you are aware of. So personally, I don't think the "18 month timeline" is something that should be applied to housing prices specifically. I'm pretty sure you and others have made this argument before, no?

[@TomStorey]

We agree. It doesn’t make sense, but people kept saying it online. I decided to make this video because people kept saying “just wait it will take 12-18 months to impact prices” but it’s the entire economy. Real estate prices seem to be impacted much faster going either direction.

[@DummMoney-rr1fi]

Wasn't it because Steve made the same video))

[@OzzeyfromVek]

if you think the last couple years of data can tell you anything about the future, i think you're wrong. the market is due for a real crash, let it happen

[@gonharaka2003]

At this point any analysis completely ignoring the new immigration plan doesn't make sense (if the targets are hit the population will shrink by 80k in by 2026, even without the that target being hit, there will be some impact for sure)

[@TomStorey]

KZbin comments: when immigration is all time high “they will all be renters and it won’t impact prices going up” - when immigration is slightly less “this will make prices go down” it’s very entertaining to watch the flip flop.

[@gonharaka2003]

@@TomStorey Well , here is the thing. if (yes big IF) the targets in the announced plan are achieved the population in Canada will shrink which has not happened since 1950s, which will have a material impact, so any analysis with this ignored is not complete. It's very entertaining watch an analysis with this fact being ignored too :) Some YourTubers (hopefully not you) : "The immigrations is going up in the next few years and that is a big factor". then then "No comments on immigration shrinking". flip flop too :)

[@TomStorey]

@@gonharaka2003 I recored this video 24 hours before the new immigration targets came out, it took a few days to edit.

[@gonharaka2003]

@@TomStorey I see. I get that. Honestly I find your content balance and I enjoy a lot. Keep the good work

[@DummMoney-rr1fi]

@@TomStorey Steve's came out way closer to the cuts. I guess his editor is much better or faster?

[@trojanproducttester]

Real Estate is Dead !! I'm making so much money in the stock market !