The sun is out as we are entering into the infamous spring housing market (might be dulled right now as many buyers sit on the sidelines waiting), the seasonal question of this spring market is that of interest rates. Many would-be homebuyers anxiously wait for the rate declines that many anticipate are coming either this month or later in the summer months. One of the biggest discussion points right now is whether now is the right time to buy, with higher rates, or should a potential homebuyer wait for rates to come down which could mean lower monthly payments? Unfortunately, nothing is as cut and dry as you might think with regards to this point though.
Let’s look at economics 101 and the concept of supply and demand which play a critical role in the real estate market. Ontario and Alberta are facing high buyer demand with limited housing supply which can result in competitive offers, offer presentation (to get competitive offers) and then higher prices. Higher interest rates likely mean less buyers as they wait for the drop to happen in interest rates which means more opportunity for someone looking to get into homeownership since there is likely less competition.
So what happens when interest rates decrease? Yes, the cost of the mortgage will go down a little but this is likely to bring more buyers and competition into the market which will likely mean higher prices to get in. So lower mortgage rates mean lower mortgage payments BUT only if the prices stayed where they are today. If the prices increase due to demand, the savings on interest rates will be lost. See what I am saying? Waiting doesn’t mean lower payments if they prices increase due to competition for homes. This new increased demand further contributes to driving up prices.
Buying now vs waiting for interest rates to drop
You’ve found your dream home and now you have to decide if it is the right time to buy or await for a drop in interest rates. Besides considering the current demand and supply in your market, it’s important to understand that if you buy now, your initial mortgage payments might be a bit higher today but you will start building equity in your home right away which will allow you to take advantage of the value being pushed up by competition for other homes around your neighbourhood. On the flip side, if you wait for interest rates to drop, you might end up paying more due to increased demand, canceling out any potential savings from lower interest rates in the future.
Prospective homebuyers should carefully think about what their “why” and “goal” is when it comes to owning their own home. Maybe you want to stop renting as rents keep increasing? Maybe you want stability? Maybe you want to build equity for the future? We all want lower monthly payment (believe me) but although waiting for lower interest rates might seem like the smart move, timing the market to take advantage is very difficult. Delaying your move to homeownership could cost you more than you’d save with lower rates.
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