A few weeks ago Canadian interest rates began to rise and the media continued making a lot out of nothing.
What I found rather interesting was the expert commentary about how this would affect those with variable rate mortgages.
I'm summarizing here but basically the higher payment amount for those with variable rate mortgages was so little that it would have no effect.
No effect? You mean the media spent a month talking about something that nobody will even remember.
Yes! And of course they've moved on and found their next fear to inflate.
This time it's the real estate correction we're due for between now and late 2011.
They've even got reports from two major banks to feed the fear.
As usual I'm here to provide these predictions with a little more context.
Fear is either in your head or someone else's and you shouldn't be listening to either.
In this article I'll be talking about what's happened over the past year to put things in their proper perspective.
Let's start with the not so obvious.
We're currently in the slump phase of the real estate cycle which began in late 2008.
Did you just crawl out from under a rock David? The papers have been talking about significant increases in resale homes, strong price appreciation, and multiple offer scenarios reappearing.
Yes, this is all true and yet as savvy investors we know to look behind the proverbial curtain for the real facts.
All of this activity is because of historically low interest rates that have caused folks to move their buying timelines up.
The result is that the visible signs of a slump have been delayed and mostly hidden.
Interest rates are only a market influencer.
The extent of the influence will become very obvious over the coming months and through 2011.
Just watch as the real estate headlines become more negative as sales activity drops.
Why is this happening David? Is it because of the increase in interest rates? Uh, nooooooo! This is what the headlines want you to believe.
It's happening because a lot of folks to buy now in order to take advantage of the low interest rates.
This has significantly reduced the number of buyers in the short term which means fewer sales.
So low interest rates have basically caused us to trade future sales for the present and it will take some time for that supply of home buyers to be replaced.
Now to those reports from the major banks stating that our real estate is overvalued and even predicting a 5 to 10% drop in prices.
I'm going to offer a different point of view and focus on a relatively recent event here in Ontario a couple of years ago.
If you're from Toronto like me then you'll hopefully remember the Land Transfer Tax that came into effect in 2008.
There was a huge increase in resale activity in the final quarter of 2007 and early 2008 as buyers attempted to avoid this tax.
The headlines then were similar to many of those we've seen in recent months.
More similar is that buyers moved up their home purchase to avoid the tax increase back then just like they have now to avoid the interest rate increase.
The result was a noticeable drop in sales activity.
Despite this there wasn't a drastic price retreat in early 2008.
The global recession in late 2008 and through 2009 did have an impact, but even then it was most obvious in homes over $300K.
Fast forward to today where our interest rates remain at historically low levels despite three increases of ¼ of a percent.
Without a drastic increase there won't be a mass exodus of buyers.
The rate is also expected to rise slowly over the next 18 months - the same time it will take for the supply of buyers to gradually return.
Since everyone likes making predictions I want to make one of my own, sans the fear.
I expect nearly the same thing to happen now that did in 2008 - values will stabilize and sales will moderate producing a balanced market.
In other words the real estate market will get a little boring which is something I personally like.
In my next article I'll dial down the emotion in our real estate investing further and continue the conversation by talking about our worst case scenario.
See you then!