When Interest Rates Go Up, Do Property Values Go Down?

In 1990, Canadian house prices plummeted. Quickly too. Between March and September, property values were slashed up to 50% depending on where you lived in the country. A correction like this hadn’t happened for decades prior, and it hasn’t happened since. So why did it happen? 

You might be quick to blame it on interest rates. At the time they hovered around 8-9%, which seems high by our standards in 2022. But if you look deeper, you’ll see that those numbers were fairly normal at the time. The 1980s saw policy rates hover around 8-13%, at one point reaching as high as 20%. So clearly, it wasn’t the movement of interest rates that caused the correction.

What Really Caused the Crash

Interest rates were high, but nothing terribly out of the ordinary for the time. There was one economic factor, however, that did change significantly: the unemployment rate. In the late 1980s, the unemployment rate was around 7%. In the early 90s, it shot up to 12%. That is one of the highest unemployment rates in Canadian history. 

It makes sense that property values would go down during historic unemployment. People need jobs to make money. People need money to buy homes. If there’s no money to buy homes, that means supply far outweighs demand – and the value of housing inventory decreases. It’s as simple as that.

The Housing Market in 2022

Looking back on 1990, it’s almost laughable to see how doom and gloom the media is over our housing market. Yes, interest rates will increase. But not by much. And even if there were dramatic rate hikes, they wouldn’t be the cause of a market correction like the one we saw in the 1990s. 

If you want to accurately forecast real estate sales and home values, stop reading articles about rate hikes. Look at unemployment rates instead. Right now, the Canadian unemployment rate is 5.9% – which is well below the 50-year average. This number may be a little inflated at the moment given the government subsidies and emergency benefits currently in place. But once these run out and people get back to work, I believe we’ll have a slightly higher but stabler unemployment rate that will continue to bolster our housing market.

Looking Ahead

As long as demand outweighs supply, we’ll continue to see property values rise. Over 400,000 new immigrants are expected to arrive in Canada each year over the next three years, many of which will be purchasing homes within their first three years of living here. No doubt this will create even more demand within our already red hot housing market.

My recommendation? Don’t try and time the market. This has always proven to be a dangerous strategy. Now is as good a time to buy as any – especially for new home buyers looking to purchase their principal residence. Get out of your rental, into the market, and control your own destiny. As long as you hang onto your property for 5-7 years, you can ride out any ebbs and flows of an economic cycle. 

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca