What Rising Interest Rates Mean For Real Estate Investors

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After years of historically low-interest rates, 2022 has seen a rise at a global scale. The Bank of Canada raised it’s rate by 0.50% last month. Both the U.S. Federal Reserve as well as the Bank of England quickly followed suit during the first week of November.

The latest hike brought the Bank of Canada rate to 3.75% (up from 0.25% at the start of 2022). So, what does this mean for Canadian real estate investors?

In this article, we'll answer that and discuss the potential implications of the Bank of Canada interest rate hikes and what it means for the market as a whole. We'll also touch on the incredible opportunities private real estate investing can offer during a time of rising interest rates.

What Rising Interest Rates Mean For The Market

As you can imagine, the rising interest rates have and will continue to affect the Canadian real estate market. Below we'll cover some of the trends we've seen thus far and what investors should keep an eye on in the market moving forward.

House prices have fallen

Since the Bank of Canada's initial 2022 rate hike that occurred on March 2nd, property values in Canada have declined for seven months in a row. This marks an 8.8% decrease since they peaked in February of 2022.

Home resales have decreased

Home sales have also decreased over the last seven months in conjunction with the falling prices. In September, national home sales decreased by 3.9% on a month-over-month basis and 6.6% on a year-over-year basis.

Rent prices are rising

With interest rates driving up mortgage costs, home ownership is now out of reach for many Canadians, leaving the rental market as their only option. This increase in demand is likely a contributing factor to the rise in rental prices seen in many places throughout Canada. In the GTA, the average rent for a one-bedroom apartment rose 20.4% to $2,481 from $2,061 in 2021.

What It Means for Real Estate Investors

It's clear that rising interest rates are having a significant impact on the real estate market. With that said, it's essential that real estate investors are aware of how this will affect them so that they can react accordingly. 

Here's what investors need to be prepared for in this changing market.

A tighter lending space: Increased interest rates lead to more stringent lending criteria for potential investors.

Increased mortgage costs: Higher interest rates mean higher mortgage carrying costs. This may price investors out of investment opportunities otherwise available to them at a time of low-interest rates.

The need for higher returns: In order to make up for the increase in financing costs brought on by higher interest rates, investors will require a higher rate of return on their investments.

However, it's important to note that the changes to the market brought on by high-interest rates and inflation aren't all bad for investors. For intelligent investors, investing in private real estate in the right markets can be very profitable. 

Here's what they need to consider when completing their due diligence.

The opportunity for higher rental income: As mentioned above, higher interest rates can price many people out of the housing market, causing increased demand in the rental market. This increased demand will allow rental property investors to increase the rent price as vacancy rates decrease.

Leveraging value-add strategies: One of the ways for real estate investors to offset increased costs caused by growing interest rates is through value add investment strategies. With this strategy, investors purchase undervalued or underperforming investment properties and then add value through renovations or improved management to increase the property's market price and potential ROI.

Multi-residential investment opportunities: In inflationary environments with rising interest rates, multi-residential properties can be a strong investment opportunity for investors. While single-family home prices tend to fall in this environment, rent prices tend to go up, causing returns associated with multi-residential apartments to rise.

Tax benefits: Tax benefits are another tool real estate investors can use to help offset the increased costs from rising interest rates. This includes writing off rental expenses such as:

  • Homeowners insurance
  • Property taxes
  • Mortgage interest
  • Management fees

Come tax time, investors also have the ability to write off a portion of their depreciable rental property through the capital cost allowance. With this, investors can write off the capital cost of the property, including:

  • Purchase price
  • Legal fees associated with the purchase
  • The cost of equipment and furniture associated with renting the property.

Investing In Institutional-Quality Real Estate With Parvis

Even at a time when interest rates are on the rise, private real estate can offer great opportunities with solid returns for investors. 

Parvis is taking private real estate investing to the next level. Instead of investing in single-unit/single-family homes, Parvis's revolutionary blockchain backed platform enables fractional ownership, providing accredited investors and eligible investors with opportunities to invest in the development of institutional-quality private real estate developments. These investments can offer more substantial returns with the benefit of requiring less upfront capital. 

With Parvis, you have options. Investors have access to a variety of different investment strategies and can choose the one that best fits their desired level of return and risk. Investing with the Parvis platform also provides private residential property opportunities, enabling investors to earn passive revenue through rental income and receive a return on their investment through capital appreciation.

Are you interested in an opportunity to diversify your portfolio with institutional-quality private real estate investment? Feel free to browse our properties with projected returns of 15-25%, or you can sign up for the Parvis platform to easily access high-quality projects today.