Buying in a Higher Interest Rate Environment

The best time to purchase real estate is when interest rates are low, right?

Most people you ask would simply answer yes, as the question seems like a no brainer. When interest rates are low, your total monthly payment is more affordable and your money is able to go further. However, there are other factors that you should consider during the first few years of your mortgage.

In this article we aim to dispel the notion that a lower interest rate environment is the only good time to buy real estate. Here are 3 reasons why you should consider buying a home or investment property during a higher interest rate environment, such as the one we are currently experiencing.

Less competition

When interest rates rise, the purchasing power of buyers who finance their purchase of real estate diminishes. This means that you are likely competing with less buyers for properties, which in turn, means that many sellers cannot demand as high a price for their properties. This can work in the favour of buyers since it provides them with a better selection of obtainable homes or investment properties. Additionally, for those who are fortunate enough to purchase a home or investment property without financing, the reasons which we listed above are even more compelling as to why it can be worthwhile to buy real estate during a higher interest rate environment.

Generating value through asset appreciation

If you are able to weather higher monthly payments, you can generate value through amortization and asset appreciation so that when rates eventually decrease, you are then able to sell your property or refinance in a lower interest rate environment at a substantial gain. This is because the purchasing power of buyers is higher when interest rates are lower.

Short term pain for long term gain

Depending on the specific home or investment property, it can make sense to take on a heavier financial burden in the short term, given that the long-term investment horizon and macroeconomic trends are promising. For example, Halifax’s historically low vacancy rate of 1.0% ¹ combined with projections that Halifax Regional Municipality’s population could increase from 460,000 to 650,000 over the next 15 years ², point towards strong rental demand in the years to come. A higher interest rate environment does not last forever and is bound to shift back to a lower interest rate environment eventually.

To summarize this short term pain for long term gain analogy, we constructed a graph shown below, which illustrates the prime lending rate ³ versus the median sales price in Nova Scotia ⁴ for each month over the past 5 years. Both data sets were indexed, which measures the numbers in comparison to the base value (100). As shown in the graph, there was typically an inverse correlation between interest rates and median sales prices. In other words, if you purchase a home or investment property when interest rates are higher and there are less buyers, you get better prices. The opposite applies if interest rates are lower, as you are able to sell your home or investment property for more due to increased buyer competition. This trend was evident during the period of time when interest rates were significantly lower, starting in March 2020, until their eventual increases this year.

In summary, we believe you should buy when other people are not buying and sell when everyone else is buying.

¹ Source: Canada Mortgage and Housing Corporation.

² Source: The Halifax Partnership.

³ Source: TD Canada Trust.

⁴ Source: NSAR.

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