Interest rates

Central Banks, Interest Rates, and the Cascading Effects on Real Estate • RENX • Real Estate News Exchange

This year, the central banks’ battle against inflation began with the US Federal Reserve with rate hikes in March and continued on November 2, with the latest increases pushing Fed rates from their lows of 0 .25% to 4%, a 16 times appreciation.

This is one of the biggest and strongest increases ever.

Central banks in countries that did not follow the US Fed (the Bank of Japan, for example) saw their currencies devalue considerably against the US dollar (the yen lost more than 30% of its value from March 2022). The Bank of Canada has kept pace with the U.S. Fed, with the key interest rate rising 7.5 times from 0.50% in March 2022 to 3.75%, but the Canadian dollar still lost more than 10% against the US dollar during this period.

He probably could have lost a lot more had Canada taken a different approach to interest rates.

Side effects experienced in Canada, worldwide

These rate hikes by central banks also triggered a horrific escalation in bond markets, destroying the prices of existing bonds and, of course, wreaking havoc on short-term and long-term borrowers.

The strength of the US dollar has also caused significant damage to sovereign nations, with Sri Lanka going through a major economic crisis and the United Kingdom (a G7 country) seeing its pension funds become stuck in a “catastrophic loop”, where banks had to sell government bonds. (known as gilts) to meet their cash calls on leveraged investments.

The commercial real estate industry in Canada is of course impacted by the macro-world around us.

Five-year mortgage rates jumped from less than 2% to 5%, causing borrowers to lose more than 30% of their borrowing power “overnight”. This results in properties being unable to maintain their sales values ​​from 2021 until today.

For sellers who were aware of the price they could get in 2021 but need to sell today, the decision becomes convoluted: either sell today at lower values, or expect interest rates decline over the next 12 to 24 months.

Unfortunately, no one seems to know where we are going, not even the central banks who use backward-looking indicators such as unemployment data or inflation figures to gauge their current and future policy rates.

If you are a buyer or a seller. . .

Sellers/owners who are over-leveraged are in a better position to take out longer-term loans (more than five years) so they don’t risk being swept away in case rates rise further over the next 12 months.

Those with low lending rates of 30% or less can probably risk waiting another year or two while hoping for a policy reversal from central banks.

For homeowners planning to sell their properties in the next 12 months, it’s probably best to opt for variable open loan terms or less than 12 months.

This would limit the bank charges associated with canceling the loan in the event that the buyer is unwilling to take on a mortgage on the spot.

For buyers, on the other hand, the best time to buy is probably now, as cap rates are higher than in 2020-21 and fewer buyers have capital to buy in a higher interest rate environment. .

Consequently, there is less competition for assets than in recent years.

The key will be to find the best assets and the most motivated sellers in the current economic environment.

The author, Mikael Kurkdjian works in partnership with Ramona Ursu and a team of real estate professionals from Baron Realty to bring the best boutique-brokerage services to the apartment transaction space in Ontario and Quebec.