PETER DOLEZAL: The interest rate conundrum

Degree and timing of softening of real estate market cannot be predicted

For several years now, the Bank of Canada, the federal Minister of Finance and most pundits have been warning Canadians to beware inevitable and imminent interest rate increases – only to be proven wrong.

If anything, rates have actually declined throughout this period.

Just this past month, the Bank of Montreal repeated its offer of earlier this year, in announcing a limited-time 2.99% offer on 5-year fixed mortgage rates.

At that rate, a qualifying borrower could carry a $300,000 mortgage for less than $1,000/month – clearly less than most rental costs.

Without a doubt, this continuing stretch of record-low interest rates has attracted the interest of first-time buyers who, despite high prices, can now afford at least a starter condo, even in our relatively expensive local real estate market.

This inflow of first-time buyers always stimulates sales even in higher priced homes, as more established homeowners, also helped by the low rates, decide to upgrade their residences.

Greater Victoria real estate continues to benefit from these low interest rates, with not only a 10% increase in home sale numbers over the past 12 months, but also a slight price increase of approximately 1% on single-family dwellings.

As can be expected in the lower price ranges where first-time buyers predominate, strata properties’ prices have increased by a more robust 2.5%.

Greater Victoria’s real estate clearly remains in a balanced state, where it has rested for much of 2014.

This is the healthiest state for both buyer and seller, with good availability, and reasonably quick turnover of well-priced homes.

The real question now, is how long this balance can be preserved, before turning once again, as interest rates eventually do rise, to a buyers’ market.

With neither U.S. nor Canadian inflation levels currently looming as a problem, with both economies still operating well below optimum capacity, there seems to be minimal upward pressure on interest rates.

Hence, we could see low interest rates continuing well into 2015.

Once the U.S. economy returns to its full pre-2008/09 potential, so will inflation pressures, thus causing interest rates in both countries to increase.

Canada is always directly affected by the economic fortunes of the U.S. – it is our largest trading partner.

Hence, it is inevitable that our rates will not escape the upward trend.

When interest rates go up, real estate markets always soften.

The degree of impact is directly related to the speed and magnitude of increases.

If we are fortunate when rates rise, they will do so very slowly, over several years, avoiding a shock wave on the real estate market.

That is the best we can hope for.

There is no question that Canada’s real estate nationally, as well as ours locally, will react negatively to future interest rate increases.

It is only the degree and timing of the softening which cannot be predicted.


A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (, Peter Dolezal is the author of three books, including his recent Second Edition of The SMART CANADIAN WEALTH-BUILDER.



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