I\’m not buying more real estate until interest rates start going back down. Since we don\’t know when that is going to be (could be 1 year or 5 years), the best thing to do right now is hold off.
Interest rates have begun to put downward pressure on house prices because people can\’t afford mortgages at these higher interest rates.
Fixed Interest rates have gone from about 2.5% up to 5%. This results in $300 to $500/month difference for a lot of people. They say that for every 1% increase in interest rates, property prices will drop by roughly 10%. This means that property prices are slated to decrease by at least 20% from their all-time highs earlier this year. Half-million dollar houses should now be listed $400K, but people are still listing them at $500K and they are sitting on the market. House prices are not going above-asking anymore, and with many of them going for exactly asking price, people are probably still overpaying. The FOMO isn\’t real anymore. People are OK with missing out right now because they can see the prices dropping. If you\’re going to get screwed on interest rates, getting screwed on the price just seems wrong. Declining house prices don\’t just mean lower prices – they represent a greater threat to the economic machine overall. If prices drop low enough, it will cause a crisis.
Does this mean I\’m selling the properties I own? No. With the capital gains, selling a property will cost $50K in taxes, so it just makes more sense to hold onto properties for another 20 years. The buy and hold strategy is still alive and well. Refinancing is out of the question now though. There is no point refinancing to a higher interest rate. I\’m on a fixed interest rate of 2.6% on 3 properties.
What would it take to sell my properties? I might panic if a nuclear event happens in the world. Mutually Assured Destruction (MAD) is a scary thing. I might also sell if interest rates increase yet again, and if central banks continue to have the same attitude towards inflation (trying to squash inflation at all costs). There is about a 60-day lag between interest rates increasing and property prices dropping, so that would give me a window to sell my properties before things get really bad. We haven\’t seen \”blood in the streets\” before, especially in Canada. It\’s possible that we will though. It\’s just when everyone forgets history that history will repeat itself, and I would not be the least bit surprised if we experience a 1920\’s style depression. But for now, I expect that interest rates will stay where they are until something breaks – being a bank bankruptcy like we saw in 2008. China\’s real estate market is not looking good and when people say that it\’s a risk to the global economy, I believe it. That real estate market has a long way to fall given the number of empty homes. There is no way to deny that it is a bubble when there is so much speculation that there are entire ghost cities of empty condos. A healthy real estate market will have those homes occupied because people need them in good times and bad. An unhealthy real estate market will have speculators dump those properties in a panic, resulting in a downward spiral.
Overall though I\’m still bullish on the Canadian real estate market because of the immigration of wealthy families that view our country as an upgrade. These families are willing to relocate and each bring $1M with them to spend in Canada. Canada\’s size and beauty are two things that immigrants appreciate most, and those things aren\’t going away.
My approach is to stay optimistic, hope Putin gets defeated, hope that China\’s real estate market crash doesn\’t affect us too much, and hope that interest rates go back down within the next 2 years so that we can get things back to normal. If all that happens, I can buy more properties in 2 years. I expect property prices to drop but then begin to increase during that time period, even if interest rates stay high. The variable interest rates that most people are using right now still allow them to purchase homes, but I do expect many homes will hit the market within the next year.