Remember when the VREB tried to tell us that the government might raise rates to stimulate the economy? Well it’s time to examine another interest rate theory that seems to come up often. Courtesy of Michael, this has been posted several times with the hypothesis that prices go up when interest rates go up, which is somewhat counter to the intuitive notion that higher interest rates will dampen prices because they reduce affordability.
Fundamentally I do agree with the idea that hard assets do well in times of inflation, but looking at the chart above there are also many times when interest rates and prices are dropping together. If we look at how mortgage rates changed compared to how prices changed across the whole period, we can get a better idea if rising rates are correlated with rising prices.
Now here we do see a (very weak fit) positive correlation that indicates that rising rates may happen at the same time as more quickly rising prices. However this doesn’t mean that rising rates somehow cause rising prices. It’s much more likely that a strengthening economy, better employment, and higher wages lead to both price gains and increases in interest rates.
The low R^2 value means the data is about useless for any predictions (see our jump in prices this year while interest rates declined). I also think that fundamentals like affordability have a much greater effect than movement in rates, and affordability is looking increasingly strained in Victoria. Continuous regulatory tightening in the mortgage market will also push up lending costs without any improvement in the economy which will throw a wrench into this already weak theory.
Anyway, back to the data courtesy of the VREB via Marko Juras.
|Wk 1||Wk 2||Wk 3||Wk 4|
|Sales to New Listings||96%||66%||
|Months of Inventory||
Still 40% less inventory than last year but the sales rate is now virtually identical, just 4% ahead of what we saw last September.
The Vancouver data is pretty grim though. The board is going to have a very tough time spinning this at the end of the month. Even the brokers are getting very nervous and advising their Vancouver clients to extract their equity while they still can.