Real estate investors: Are you prepared for lower interest rates?

Andrew la Fleur: Real estate investors, are you prepared for lower interest rates this year? That’s right, I said lower, not higher. Find out what I mean in today’s episode. Stay tuned.

Speaker 2: Welcome to the True Condos Podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market, and condo investing in Toronto.

Andrew la Fleur: Hi, welcome back to the show. As always, your host here Andrew la Fleur. Thanks for listening in. If you haven’t had a chance yet, make sure you do check last, the last episode from last week with Mortgage Jake, getting a lot of positive comments about that. A lot of people found some serious value from that episode. Make sure you go back and check out the episode there with Mortgage Jake if you haven’t already.

On today’s episode as I mentioned in the intro, I want to talk about interest rates. Specifically, I want to ask you, the condo investor, I want to ask you the question, are you prepared for lower interest rates to come this year, possibly very soon? That’s right, I’m talking about lower interest rates. Obviously most of the chatter, and most of the talk in the marketplace, and in the industry over the past few years has been higher interest rates. Actually, it’s been nothing but talk about higher interest rates probably for about a decade, almost as long as I’ve been in the business to be honest. I’ve been doing this, helping people invest in the condo market as a real estate agent, oh, well it’s almost … I guess it’s 12 years, 12 years this month actually, that I’ve been doing this.

For the vast majority of those 12 years, probably the last 10 years all the chatter has been about interest rates are so low, they’re too low, they’re historically low. Interest rates, they go down, but they always go back up, and they will go back up, and they’ll always up, and they’re too low, and get ready everybody. Be prepared, it’s all going to change when interest rates get back up to normal. Or, I’m not going to buy because what if I buy today, and interest rates go up? Then, the math doesn’t work out. If my mortgage is X percent instead of X percent that I’m paying now, then it just doesn’t work. So, I’m going to sit on the sidelines.

Yeah, I’ve heard it all over the last 10 years. Yes, interest rates have finally, after eight years of chatter, they have finally come up from the low, low, low levels they’ve been at. But, they’re still very low. They haven’t come up very much. They’ve gone up I think five times, so just over a percentage they’ve gone up since 2017, to where we are today, and the current sort of interest rate cycle. But, they’re still very, very low. Still historically low, still lower today than when I bought my first property back in 2000 … What was it? 2006, I believe, when I bought my first condo.

Interest rates today are still lower than they were than. Yeah, I mean that pretty much tells you all you need to know. After 13 years, they’re still lower, and they’ve been basically lower … Shortly after I purchased that first condo, the interest rates started trending down. Actually no, so they went up. They went up a little bit after I purchased, and then for maybe six months, nine months, something like that. Then, they started trending down from that point onward. They’ve basically been down in the basement for that better part there of the last 13 years. Until recently they’ve started to come up, as I said, but they’re still lower than where they were back then.

What’s going on here? As I’ve talked about many times on the podcast, my own personal take on the matter, my own thesis is that we are in a low interest rate environment, we’re going to continue to be here basically for many years to come. Perhaps this is going to be decades to come. Some people are of that mind, and some analysts and economists are of that mind. I personally am leaning towards that side of things. I really don’t see us returning to getting us out of this hole that we’ve dug of super low interest rates anytime soon. I think it’s just the new reality of the world that we’re in for the time being.

Of course I could be wrong, but based on observing it, and studying it, and looking at it over the last 13 years, I think we’re going to be here for a while to come. It’s just very hard to get out of this hole once you’re down in it, as we’ve seen over the past few months. Data just came out this week actually and said that the economy in Canada actually shrunk perhaps, slightly. 0.1%, the economy might have actually shrunk in December, which again is crazy. I mean, overall the economy’s doing very well. But, we just … Basically, we can’t handle these slightly higher interest rates, and everything sort of starts to fall apart.

The Bank of Canada just is walking a tightrope here. They want to get interest rates up higher, perhaps if for nothing else just so that they have someplace to go if a recession does hit. They want to get them up to a higher point. But, every time they try to do that, and they’ve been trying over the past couple years, and they’ve only been able to get it up, as I said, about one … I think it’s one and a quarter percent, something like that. Here we are just with that slight little increase over a long period of time, and the economy shows major signs of weakness. So, as expected with the news coming out, we’re starting to see headlines, and we’re starting to hear chatter about, forget about interest rate increases in 2019. Start getting ready perhaps, for interest rate decreases in 2019 if this continues, and if the economic numbers continue to be like this.

Here, sure enough there’s an article here, I’ll include a link in the show notes from this week, “Bank of Canada to cut rates before the end of 2019,” says Capital Economics. Now, normally I wouldn’t quote anything, or take anything too seriously from Capital Economics simply from the fact, because of the fact that they are possibly one of Canada’s most famous on public record housing bears, and they’ve been very bearish on all things housing for years, and years, and years.

These are the guys that have called time and time again for 40%, 50% housing crash in Canada. They’ve been saying it for years, and years. Of course, it hasn’t happened. But, interesting to know that, that … I find it interesting that these guys, who you would think they wouldn’t want to say anything that could potentially stimulate the housing market, ’cause their whole thesis is the housing market is going to crash. But, here we are, and they’re calling for interest rates to decrease in 2019, which obviously would be a stimulant to housing if you have lower interest rates, and generally speaking.

But yeah, I think more and more people, we’re going to see calling for not just Capital Economics types, but other people on both sides of the housing equation, both bear and bull. We’ll start to see more and more of this.

Just to recap, taking a step back from this, and we’ll talk more about what I have to say about if getting ready, are you prepared for interest rates decreasing? But, let’s recap. A couple of the forces that are holding back the housing market. So yeah, the housing market in the GTA, in our little bubble here in Toronto is doing very well, very strong market overall. But, across Canada, the stories a little bit different. The housing market across Canada is definitely not as strong. Wouldn’t say, it’s certainly not terrible, but it’s not showing signs of strength.

A couple of the factors, two big factors that are sort of affecting the housing marketing broadly speaking, across the whole country. Number one, is the fact that interest rates have risen. Even though they haven’t risen much, they still have risen. The cost of getting a mortgage is more than it was a year and a half, two years ago, you know? You could get a fixed mortgage rate as low, you know, the market sort of bottomed out. You could get five year fixed mortgages around like 2.2%. Now today, a five year mortgage fixed is around 3.5%. Variable mortgages, you could get around two percent at the bottom there. Now, variable today, somewhere around three percent, 3.2%, something like that.

Interest rates have, actual mortgage rates have gone up around a percent, to a percent and a half, depending on who you are, over the last couple of years. That obviously has been a force, a factor in the market broadly speaking across the country. That is holding the housing market back across the country. The second thing of course, which we talk about all the time, is the stress test. The stress test was brought in 14 months ago now. The stress test of course, puts a greater restriction on you, the borrower, basically reduce your buying power by about 20%. You combine prices of properties going up significantly, and your ability to buy going down significantly. That has been a major force, a factor, a drag on the housing market overall across the country.

Again, we’re not speaking specifically about Toronto, but just in general. Trying to put yourself in the shoes of somebody thinking about the real estate markets across the country, like the Bank of Canada who sets interest rates, the federal government who makes some of these decisions, [inaudible 00:11:02] and so on. Thinking about this from big picture perspective. Those are some of the forces holding things back.

Now, talk about potential new developments or changes, things to watch for that may affect interest rates, that may actually cause some things surprising to happen, like lower interest rates. What are some developments, or improvements in the housing? What are some developments that you need to be watching for as a real estate investor in 2019? Well, and what am I watching for? Well number one on my mind is, the federal election coming up. Anytime there’s an election, especially federally, you’re going to get, you’re going to hear some wild things, and some interesting proposals from all the different parties.

One of the things that is potentially on the table is making it easier for people to get into housing, to purchase real estate. The stress test, is the stress test going to be removed, is it going to be altered in some way? Is there going to be less stress, less of a stressful stress test? Instead of two percent, is it going to be one percent, you know? What kind of proposals are going to be out there, and how might that affect the market, and what will actually be implemented? Will they do something with amortization? Periods, will they bring back longer amortizations to effectively lower your monthly cost of borrowing? What other … Will they give rebates, or tax breaks or something for first time buyers, you know? To help people get into the market, or for people moving from renting to buying? Who knows what they might come up with. There’s always new surprises to come.

But, the point is, it’s an election year. We can expect there will be some of these cookies that will be offered to us as voters, so that we will vote for the various parties. Particularly, the party, the liberal party that’s in power. I think that the pressures on them to offer some of these cookies for people. Again, broadly speaking. Not just think about Toronto, but across Canada. There’s a lot of people who are not happy because they want to get into the housing market, but rising interest rates, and the stress test have been a couple of major factors holding them back, and rising prices. That’s an interesting thing that we want to keep our eyes on.

The other obviously big potential development, as I already alluded to is, just lower interest rates. And, the fact that … Forget about the election, and just the Bank of Canada, may just have to lower interest rates. If this economic data that’s coming out continues, and if we’re seeing slowing growth, or actual negative growth, and we’re potentially entering into a technical recession period. Certainly, that would be a strong impetus to actually lower interest rates. As much as the Bank of Canada has been almost trying to talk it into existence, name it and claim it. Sort of, if we just keep saying it enough, we’re going to raise interest rates, maybe that people will get it in their head, and the economy will somehow forge the path ahead to make that happen.

Well, it only works to a certain extent. You can only work with the cards you have, and right now the cards that they have are not good, and they’re not saying raising interest rates. Probably, interest rates are not going to go down anytime in the next … They have an announcement this week. Certainly I wouldn’t expect them to lower interest rates this week. They’ll probably, 95% chance they’ll just keep them where they are. But, at some point this year, if this continues, they probably are going to have to lower interest rates with this weak economic data that’s coming in.

In conclusion, pulling this back, wrapping this back to where we started. Are you prepared as a real estate investor for lower interest rates? Well what I mean ultimately is, nothing’s guaranteed in this business of real estate investing. You have to be prepared for anything. Interest rates going up, interest rates going down, interest rates going nowhere, great economic times, bad economic times. You as an investor have to be prepared for it all. I mean, the best way to get through a storm is just to … Or, the good times, the highs and the lows, is just to have a long term mentality and understanding that real estate is a long term game. The market’s going to go up, and the market’s going to go down all the way up. It just continues. Over the long run, it’s just going to continue to go up. The longer that you are in the game, the longer that you have equity in the market, the greater that equity’s going to become over time.

If you’re a short term thinker, you’re never going to win at this game. You’re going to … It’s very risky, and you’re most likely going to lose. The house always wins in the short term sort of scenarios. But, if you’re in it for the long term, if you understand how to play the game with a long term mindset, you’re going to be fine regardless of interest rates going up or down. You are going to be more than fine in the long run.

Don’t be surprised if nothing happens this year, or don’t be surprised if something big happens this year. We might not see … Interest rates 12 months from now might be the exact same place where they are right now. We might get some good economic news, we might get some bad economic news. The federal election might come and go with no major changes to the stress test, or cookies for first time buyer. None of it might happen, or there might be something huge, and different, and it might set fire to the real estate markets across the country. You know, the stress test could disappear overnight, and prices would shoot up overnight all across the country, if they did that. It’s probably not going to happen, but it might happen, and it’s just important as an investor to be aware of these things, and to be understanding that again, nothing is guaranteed in this business, and anything is possible.

But overall, just another reminder. When it comes to this conversation around interest rates that, overall rising interest rates is ultimately a good thing. Rising interest rates indicates a strong economy. All things being considered as investors, we would prefer to have interest rates going up, than interest rates going down. Even though when they go down, it becomes cheaper to acquire assets, which is good. But, it’s a signal that the underlying economy is not doing well. Ultimately what we want as investors, is for a strong and growing economy. As long as the economy is strong and growing, people have jobs, people have incomes, people are making a little bit more money today than they were yesterday. Then, that’s going to keep prices moving forward, and rents moving forward. Ultimately that’s what we want. But of course we know, things don’t always go up forever in a straight line. There will be ups and downs in any market.

There you have it, I hope that gave you some food for thought as you’re thinking about the year ahead, and as you’re thinking that hey, you know what? Maybe interest rates might actually go down this year instead of up, and how might that affect your plan and your strategy as an investor, as you’re building out your portfolio. Hope you found some value from this episode. If you did, go ahead and share this with somebody that you know. Pass it along. Make sure you subscribe to this podcast so you never miss an episode. Leave a review or a rating on iTunes, I would appreciate that. And of course, make sure you’re receiving our weekly email updates. You don’t want to miss them. They are the best email in the Toronto condo market, coming at you every single week. And, you’ll never miss a great investment opportunity if you’re getting those emails. Just sign up anywhere at TrueCondos.com, with your name and email.

Thanks very much, and until next time, happy investing. Talk soon.

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