July 8, 2022

The Bank of Canada intended its aggressive rate hikes to cool the red-hot housing market and simultaneously curb inflation. While the impact of higher rates is starting to show through subdued sales activity, the pain is just beginning for homebuyers and homeowners alike.

With interest and inflation rates climbing in tandem, homebuyers will carry heavier financial burdens. Nasma Ali, a real estate broker and founder of One Group Toronto Real Estate, said, “First-time homebuyers are especially vulnerable given the fact that they have yet to enter the market.” She added that many are jumping in with no equity.


Some homebuyers lament the discouraging situation. Interest rates are rising, but home prices haven’t gone down significantly. Thus, if you proceed with a purchase, the upfront down payment and monthly mortgage payments will be higher.

Ann-Marie Lurie, the chief economist of the Calgary Real Estate Board, expected higher interest rates to affect home sales. While she sees a shift toward more balanced conditions and downward pressure in prices, sales are still at record levels and prices are still far above expectations for 2022. Lurie mentioned the market in Calgary in particular.

Homeowners’ vulnerabilities

Several economists and strategists are sure of a 0.75% increase in BoC’s policy rate this month but they don’t discount the possibility of a full-point hike. Canadians with home equity lines of credit (HELOCs) are most vulnerable to the steep climb in interest rates.

Since many HELOCs are based on a variable-rate interest, borrowers will pay higher payments as interest rates rise. Interest rates on HELOCs are usually tied to a bank’s prime lending rate. Hence, the principal is extra sensitive to rate hikes in a variable rate scheme.

Even if a lender offers fixed-term home equity loans within a specified period, HELOC rates remain susceptible to rising interest rates regardless of an increase or decrease in the principal amount. Starting in late 2023, the Office of the Superintendent of Financial Institutions (OSFI) will require borrowers to pay the principal and interest on any combined loan amount above 65% of the home’s value.

Dividend machine

On the stock market, the real estate sector underperforms with its 22.67% year to date. It’s the third-worst-performing sector after healthcare and technology. Nevertheless, real estate investment trusts (REITs) remain popular with income investors, especially Choice Properties (TSX:CHP.UN).

At $14.09 per share, you can partake of the high 5.27% dividend. The $4.62 billion REIT has returned to profitability in Q1 2022 due to high rent collections and positive leasing momentum. Net income for the quarter was nearly $387 million compared to the $62.2 million net loss in Q1 2021.

The core assets of this REIT are essential retail and industrial properties. Its residential platform is also growing. According to Rael Diamond, president and CEO of Choice Properties, the near-term plan is to focus time and capital on the core assets and the robust development pipeline.

Consequences of rate hikes

The OSFI is tightening the rules on certain mortgage products they want to prevent homeowners from drowning in persistent debt. Furthermore, a supersized rate hike next week could freeze the housing market and cause further declines in house values.

Christopher Liew, CFA


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