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. 🙂
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. 🙂 But make sure you have a long term strategy because you will most likely not be living in the same place forever.
Random Useless Fact: