Rising interest rates hitting new B.C. homebuyers

Rising interest rates and falling home values are putting pressure on some new homebuyers in B.C. who may have leaped into the market at or near its latest peak.

There are worries more people are having trouble keeping up with variable rate mortgage payments, and they can’t afford to sell as home prices fall.

“A lot of people have taken a lot of debt to buy properties at prices that may not reflect current macroeconomic conditions — in particular, interest rates that have more than tripled in many cases in a pretty short span of time,”  Thomas Davidoff, an associate professor at UBC’s Sauder School of Business, said.

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“When their loans come up for renewal, they are going to owe a lot more every month than when they signed on, and they may have a property that’s worth less than what they owe.”

Davidoff says it’s a cautionary tale for buyers.

“The moral of the story is there’s a big fear of missing out — if I don’t [buy] a property today, I may never get in — but the thing is, buying does not eliminate risk. There’s no guarantee that the price won’t wind up having been excessive and low-interest rates today don’t mean low-interest rates forever. Some people may have gotten themselves into nasty positions through mistiming the market,” he tells CityNews.

So what are the options for new homebuyers who find themselves in this scenario?

“The good news is, most mortgage loans in Canada — even variable rate loans — your payments will only jump a little bit, even with fairly large interest rate increases. You may have to cut back, of course, on optional spending and even stuff like food and clothes to avoid defaulting on your debt. When payments increase there may have to be some sacrifice. In a bad enough situation, bankruptcy may be the best option but, hopefully, people will be able to make the small adjustments necessary to stay afloat.”

Davidoff says he will be watching how things unfold.

“I think in a couple of months, assuming interest rates don’t come down quickly, it will be interesting to talk about the possibility of people starting to default on mortgage loans. We may see some people who simply don’t have the ability to continue to make payments. I hope that isn’t the case and, because of stress testing, I think for most people it won’t be. But I do think we will see some people in significant trouble unless interest rates move back downward.”

RE/MAX Canada has just released its latest housing outlook, predicting prices for Metro Vancouver will continue to decline for the short term — another three per cent this fall — but it predicts the “pressing concern” of low inventory will put upward pressure on home prices in 2023 and beyond.

The Bank of Canada’s next interest rate announcement is set for Oct. 26.