JOSH BUCHANAN
December 18, 2022
As I'm sure most of you are aware, the Bank of Canada just increased the overnight lending rate once again on December 7th by half of a percent in hopes of reducing the inflationary pressure that they were largely responsible for in the first place. This is now the 7th rate increase since March 1st which combines for a total increase of 4%. This type of extreme movement is something we haven't seen since the 1990s for the target overnight rate.
To be fair, sales numbers in Saskatoon were falling prior to the first rate increase. You could argue that this was due to the expectation that rates were going to go up -which may be true- but I think part of it was just that the market was finally coming down from it's pandemic sales surge.
Here's a look at the rate increases graphed alongside the year-over-year declines in sales numbers up until December 15th:
I plotted the percentage decrease in YoY sales in an upward direction so that it was more clear that the negative changes are increasing. Hopefully, it isn't too confusing that way.
You can see that sales numbers are declining by an increasing margin compared to the same time last year just as interest rates keep going up. Again, it could partly be because the market is finally just slowing down after over two years of craziness but I think it's obvious that interest rates are playing a major role in this downturn as well.
In my opinion, the worst of the rate hikes are behind us but the worst of their impact may still be yet to come.
Based on the current trajectory of the market, I am expecting 2023 to be the slowest year we've seen in quite a long time. Sales numbers were bound to come off their pandemic high at some point but all the increases in interest rates lately have certainly sped that process up.
It's a bit frustrating for me to observe even though it doesn't really affect me. It just doesn't need to be like this. The market has been so up-and-down over the past 15 years and the volatility just feels excessive.
If you bought:
1990-2006: you did very well short and long term
2008: you did poorly in the short term
2009-2013: you did fine
2014-2016: you did very poorly for a while
2019-2020: you did really well so far
2022+: you're probably going to see a rough patch moving forward
Generally speaking, this is why it's not a great idea to buy a property knowing that you'll probably have to sell within a few years of buying. There are recent examples of homes losing value within 5-year time frames but it doesn't really happen over longer terms like 10 years. On that note, I am very excited to announce that I have partnered with a local Realtor and mortgage broker in Saskatoon and we will be providing a Saskatchewan First Time Home Buyer Seminar beginning in late January. The seminars are totally free, will be held once per month, and will cover all the most important things to consider before buying a home and the steps of the buying process. You can find out more details and reserve a spot for one of our seminars here.
Also, as mentioned in my previous post, I have created 4 different online classes through Skillshare including 3 based on personal financial management. They can all be watched for free using a free 1-month trial membership here.
Ideally, property values would simply increase by a small percentage each year so that homeowners are gaining value but not so much that prospective buyers aren't kicking themselves for waiting it out to improve their situation before buying. Generally, I think price inflation is a bad thing and we should actually be trying to become more efficient so that the cost of goods and services fall. However, real estate is one exception.
We've gotten so used to these artificially low interest rates over the past 15 years but if we eliminated the central banks and just allowed the free market to decide interest rates, I feel like they would be somewhere around 5% which is where we are currently at. I say this because I imagine most lenders would not be interested in lending $10,000 for a year in exchange for $150. If they were offered $1,000, most would be happy to lend at that rate. Likewise, I think most borrowers would be happy to borrow that much for $150 but be hesitant at $1,000. So, around $500 which is 5% of $10,000 is probably close to the middle ground where lenders and borrowers would generally agree to a fair transaction. Without central banker intervention, interest rates would have never been so low.
Conclusion:
As mentioned in post #254, the overall economy in Saskatchewan is actually really strong right now and all the major indicators are good. However, all the interest rate increases are really going to disrupt the market. I'm not expecting any major crash in prices, especially because the market does not have excess supply. That said, I do think buyers are going to put downward pressure on prices moving forward because of how much extra they will be paying on their monthly mortgage payments and interest for the mortgage terms. Stay tuned, subscribe to the blog if you want. I will be keeping an eye on things in 2023.
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Please check out my new business website at www.magnaltus.com where I provide several different services and will also be writing some blog posts there on other topics.
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