How increasing interest rates will cause housing prices to rise

The latest interest rise may actually spark an increase in home sales, says a Calgary real estate investment expert.

Expert predicts short-term sales bump in Calgary, followed by a slowdown in early 2018

Raising interest rates in order to dampen housing prices may achieve exactly the opposite -- at least in the short term, says Calgary real estate investment analyst Don Campbell. (Sean Kilpatrick/Canadian Press)

If Canadian real estate history is any indication, the latest rise in interest rates may actually cause prices to rise, says a Calgary real estate analyst.

In an interview on the Calgary Eyeopener, real estate investment analyst Don Campbell said that history shows interest rate rises tend — in the short term, at least — to provoke buyers anxious to get into the market to jump in, rather than out.

"If you're a buyer, here's what always happens after an interest rate increase, and you can see it throughout Canadian history," said Campbell. "Interest rate [increase] announcement occurs, most people assume that everything slows down.

Fear of missing out drives buyers

"[But what actually happens is that for the next couple months, it actually increases the number of buyers in the market, because now FOMO — fear of missing out — kicks in," he said. "And [potential buyers are] going uh, oh, we're at the bottom. We better find a way of getting into the market."

What complicates things is that the federal government has been adjusting mortgage eligibility guidelines in response to perceived overheated markets in Vancouver and Toronto, adding an extra variable for buyers in less frothy markets, like Calgary's.

"Over the last year, year and a half, they've really changed a lot of policies around the housing market to try and slow it down," Campbell said, "and they really haven't worked. It's worked a little bit in Toronto, but then they'll come back.

"With this interesting move [to increase rates]," he added, "which most people thought would happen in October, we're starting to see there are other strings that can be pulled to slow the housing market down — and that's exactly what Calgary doesn't need right now."

Add to that the idea that the market has reached its bottom, and you see people moving into the market, rather than away from it, Campbell says — despite signs to the contrary in Calgary's housing inventory.

"I believe we've hit the notional bottom," he said. "That doesn't mean we've hit any bottoms because if oil goes to $22 and the Alberta economy continues to [lag] many of the other provinces, you're not going to see the in-migration that we've seen [in past years]."

Short-term bump, long-term slump

What Campbell suspects it means for Calgary is a short-term housing bump, followed, in early 2018, by a slowdown.

"Right now in Calgary, the inventory is fairly high," said Campbell, "but the average price has just kind of putzed along since January 2015.

"[With this rate increase] you'll see some of those buyers in that $400, $500, $350,000 range start to move into the market."

"So bizarrely, even in a slow market like Calgary, you'll start to see competing offers in those prices, which will then drive those prices up and out of affordability range."

Downtown condo listings surge

On the condo front, Campbell attributed a surge of downtown listings to investors looking to flip properties in a challenging market.

"The number of listings of condominiums in downtown city centre core jumped," he said. "There were a lot of people who pre-bought those, who thought they were just going to flip them. That's a scary perception in any market, but in the Calgary market, that's really hurt them."

The bottom line, says Campbell, is that homeowners ought to lock in long-term mortgages sooner than later, buyers beware the interest hike fake bounce, and Calgary condo flippers may be in for a dry stretch.

"You're going to get a bump in that three to six hundred thousand dollar range because it's compressed," he said, "but once again, when the reality sets in on the economy, I think you're going to see that bump fall off and head down in January, February."


With files from the Calgary Eyeopener