The unintended victims of higher interest rates

Who does higher interest rates hurt the most?

The obvious answer is people who have variable rate mortgages.

But there’s a group of people that are even more at risk, and are hurting more from the impact of higher interest rates. They are renters.

Why renters? Because as the cost to borrow becomes more expensive, would-be buyers who are currently renting are priced out of the market. The current qualifying rate based on stress test rules is about 7.0% to get a mortgage. It used to be 5.0%. That means the purchasing power of prospective buyers has dropped like a sack of potatoes.

This inconveniently forces them to stay in the rental market for longer, competing with others renters, driving rent prices higher.

And the amount of available units for lease are getting smaller by the day. Why? Because some landlords can no longer handle the higher cost of managing a rental property. So they’re selling.

Last week we saw the most new listings in the Greater Vancouver area in some time.

But who’s buying these properties? It’s not investors. Buying real estate to invest makes no sense today as interest rates are likely to continue climbing and the projected investment returns are the worst in years.

This means it’s most likely going to be an end user who buys the property. Unfortunately the current tenant living in the unit will have to move out to make room for a new household.

This means the tenanted unit will turn into a principal residence, shrinking the overall supply of rental units. And we all know what happens to rental prices when you reduce the number of places available to rent. πŸ™‚

 

Governments help in vain

Local officials will try their best to appease the renters. But their efforts will only backfire. Rent control is one of those policies that sounds good at first. But critical thinking reveals that it’s only going to hurt renters in the end.

For example I live in B.C. where the government has allowed a maximum rent increase of 2% in 2023. A lot of renters like the sound of this. But we don’t live in a command economy where people have to do what the government says. Instead, we have choices.

Mortgage terms renew periodically. In fact, about $600 billion worth of housing related debt will be repriced at a higher interest rates this year.

The cost of mortgage has gone up. We’re also seeing double digit inflation in insurance premiums, home repairs, and property taxes.

Many landlords are seeing a 20% increase to the cost of maintaining a property compared to a year ago.
Capping rent increases to 2% does not match the reality of the economy and will only create unintended consequences.

For example, it prevents a civilized negotiation between the tenant and landlord to share the higher cost of living fairly.

Instead, the landlord will be forced to sell or renovate the home, or do whatever it takes to get the tenant out.

And the renter who is forced out will have to find a new home and pay the new market rate, which will likely be much higher than what they’re use to paying.

 

Higher prices likely ahead

But don’t take my word for it. The evidence is already clear that higher rental rates are here.

In Toronto for example, the rent price for a 1 bedroom condo went up 13% in just the last 5 months.

The price of a Vancouver 1 bedroom unit increased 18% over the same time in case you’re wondering.

Both Vancouver and Toronto have rent controls in place for years. They are clearly not working.

Imagine how much higher rent will be by next year. 😯

 

Higher interest rates aren’t good for mortgage holders. But the median net worth of a home owner is over 10 times that of a renter. Most property holders can handle higher interest rates.

So as economists and analysts debate about how monetary tightening affects mortgage payments and delinquency rates, I think renters are often overlooked as the unseen, unintended victims of this whole situation.

I don’t really have a solution for people who are renting, except to prepare for uncertainty ahead.

Obviously if you’re fortunate enough to live in a rent controlled building you are probably safe for the time being. πŸ™‚ But make sure you have a long term strategy because you will most likely not be living in the same place forever.

 

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Random Useless Fact:

 

 

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AlW
AlW
09/12/2022 3:13 pm

You may be right in there are more people leaving the landlord life behind due to the decreasing returns. I feel many landlords simply sold their rentals when the market was nuts cause they could cash out.

I know personally I saw prime go to 5.45% and I made the decision to repay my loan to purchase the dental practice. For years I had invested this money but the spread between investment returns and the prime rate was getting less and less. I was sitting on a large sum of money as I had just had a few mortgages pay out so I just paid it off.

I think it’s a great time to reduce your debt, but keep it liquid and easily accessible so you can take advantage of buying opportunities.

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AnotherLoonie
09/16/2022 8:30 pm

Good stuff. Agree with you 100%.

Paul N
Paul N
09/20/2022 12:08 pm

Some of us are old enough to remember the late 80’s and early 90’s. Unfortunately many current factors are aligning with that time again. People sending their house key set in a fed ex envelope to their bank, walking away from their houses. IMO we never allowed the markets to do a true correction from 2008, Its been literally over 10 years of artificial stimulus labelled as MMT now coming home to roost. I hope i am wrong, but we could be in for a hard landing.

maplethrift
09/26/2022 2:56 pm

also worth mentioning is the there will always be movement within the country from other provinces to BC that will eat up some real estate; albeit not a whole lot due to these prices and interest rates but as a whole BC has always been a final destination for Canadian retirees as well as investors… being in a variable rate right now would drive up the amortization if it’s not “caught up”, I’d certainly entertain locking in a rate but it’ll depend on how much cash flow it’ll impact