Interest rates are one of the biggest drivers of the real estate market, especially when buying or selling property. They have a strong impact on the housing market as they influence home prices and mortgage affordability, among other things. Today, we will help you understand how interest rates affect the real estate market and what buyers, sellers, and investors should know to deal with it.
What Are Interest Rates?
Interest rates are the price of borrowing funds, usually in percentage terms. Most buyers finance the purchase of a home through mortgages, and the interest rate on those loans dictates the payment amount buyers will pay back in addition to the principal amount. For example, the higher the interest rate, the more costly it is to borrow money, or the lower the interest rate, the more affordable it is to take out a loan.
How Interest Rates Affect Buyers
Mortgage Affordability: For buyers, one of the most immediate impacts of interest rates is on the affordability of mortgages. Low interest rates allow buyers to get bigger loans at cheaper costs, which makes homes affordable. Conversely, when interest rates go up, monthly mortgage payments grow, which may make it harder for buyers to afford the dream home.
Mortgage Rates: Buyers can borrow more at the same monthly payment, increasing their buying power.
High Interest Rates: Buyers might have to compromise and opt for a cheaper home or renegotiate their budget to account for higher monthly payments.
Home Prices: Home prices can also be affected by interest rates. When interest rates are low, home demand increases because borrowing is less expensive. When the amount of people wanting to buy homes increases, it often causes home prices to rise. When interest rates rise, however, fewer buyers can afford homes, reducing demand. This, in turn, can lower home prices.
The Impact on Sellers
For sellers, interest rates limit the number of potential buyers. Low interest rates allow more buyers to compete in the market, which can drive up home prices. In a competitive market, sellers might get several offers and sell their homes for more than their listed price. When interest rates are high, fewer buyers can afford homes, causing listings to linger on the market longer and possibly sell at lower prices.
Interest Rates and Real Estate Investors
Interest rates also impact real estate investors but for different reasons. For investors financing their property purchases, higher interest rates mean higher costs on borrowed funds, which can cut into profitability. However, investors who already own properties with fixed-rate mortgages are less affected by the rise in rates.
Changes in interest rates can also shake up the rental market. As mortgage rates rise, fewer people might be able to purchase homes, causing a more significant demand for rental units. This will give real estate investors opportunities to jack up rents or buy properties at the right price.
The Role of Central Banks and Economic Conditions
Depending on economic volatility, interest rates are primarily controlled by central banks, including the Bank of Canada or the Federal Reserve in the United States. Central banks raise and lower rates to rein in inflation and spur or cool down the economy. For instance, they might reduce interest rates during the recession, stimulating borrowing and spending. In contrast, during strong economic growth and inflation periods, they may increase interest rates to cool borrowing and rein in prices.
Conclusion
Interest rates are a major player in real estate, affecting everything from affordability to the housing market. Knowing the relationship between interest rates and the market is instrumental to your decision-making process as a buyer, seller, or investor. As the rates ebb and flow to the changing economic tides, keeping a pulse on the economy’s overall direction and evolving with it will allow you to stay ahead of the game.
If there are any other real estate and financial strategies you would like advice on, please contact us, Charn Hansra, to discuss how rate changes might be impacting your real estate aspirations.