Interest rates

Housing in Canada: Interest rates rise, but prices still go up 20%

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Home prices in Canada continue their seemingly unstoppable ascent. In February, the average price of a home in Canada reached $816,000, a year-over-year increase of 20%. This year, the Bank of Canada kept its promise to raise interest rates to fight inflation. Interest rate hikes have already started, but so far housing inflation continues to climb.

Why housing in Canada continues to rise

There are many reasons why Canadian homes always more expensivedespite rising interest rates.

The first is that there are not many vendors. While the housing stock in Canada is growing, the supply coming to market is not. In many large cities, buyers outnumber sellers, leading to price appreciation. Higher interest rates may not help this. With rising rates, people selling their homes may have to borrow at higher rates to buy a new one. Awareness of this fact may be part of the reason people just don’t sell.

A second factor is foreign investors. There are plenty of foreign companies that will invest in Canadian housing just to see the price rise. The prevalence of this phenomenon may be overestimated, but it is a significant enough factor that the Trudeau government is now taking action against it. In the last budget, the federal government announced an additional tax on foreign home buyers and other measures to cool the housing market. Thus, the foreign investors’ affair is important enough for the federal government to take an interest in it.

More rate hikes to come

If interest rate hikes haven’t yet brought homes down to a level you can afford, it may be best to be patient. The Bank of Canada is not done raising interest rates in 2022. There are more to come. Potentially, future rate hikes will cool housing demand enough for prices to start falling or at least stabilize. It’s not a guarantee, but it could potentially happen.

Insane takeaways

Despite all the ongoing interest rate hikes, housing remains out of reach for many Canadians. If you are one of them, you might want to wait. Future increases in interest rates could eventually cool the market. However, you will end up paying more interest on the same size mortgage in such an environment. So maybe housing isn’t the best investment right now.

That doesn’t mean you can’t invest in real estate, though. Through REITs like RioCan Real Estate Investment Trust (TSX:REI.UN), you can buy and sell real estate portfolios on the stock exchange.

REITs are common investment vehicles similar to stocks that hold diversified real estate portfolios. And you can start buying them for a very low initial cost. RioCan units are currently priced at $24 on the TSX. With a non-free trading app like Wealthsimple, you can start buying REI.UN today! Of course, one action isn’t exactly going to make you rich. But if you buy over time and gradually build up a $100,000 position, you’ll earn $4,000 a year thanks to REI.UN’s 4% dividend yield. That doesn’t mean you should invest in REI.UN or any other REIT.

As always, you must do your own due diligence. But RioCan is a good example of the type of income possible in the REIT world.