What High Interest Rates Mean for Kelowna Development
Canada’s benchmark interest rate hit 3.75% on October 26, 2022, as the central bank tried to tame
the historic inflation levels in the nation.
The rise in interest rates will consequently impact many aspects of the economy, including the
labour market, cost of borrowing and available capital.
The development industry in Kelowna is also bound to be influenced by the 50-basis point hike.
Curious to know how? Let’s dive into what these new high-interest rates mean for the British
Columbia developments.
High Cost of Development
With the surge in interest rates, financing projects have become more expensive. Since the lending
requirements are now tighter, developers may find difficulty in acquiring bank financing to develop
and construct their projects.
However, it’s also noteworthy that prior to 2020, the interest rate was 1.75% and forecasted to be
2.75% by 2024. This means that once developers complete their the end user will be able to secure
loans at much lower rates.
Lower Construction Costs
Here’s another impact of the high-interest rates in Canada. We anticipate a reduction in
construction costs as we are experiencing a decline in the number of housing starts. Construction
costs had a disproportionate increase in cost when compared to Consumer Price Index (CPI) which
measures inflation. This increase was driven from the supply chain issue that developed during the
COVID-19 outbreak and a housing boom fueled quantitative easing from the Bank of Canada. As
housing starts and issued building permits decline, the supply chain will recover due to reduced
demand. This is already observed from the World Container Index which tracks freight rates for 40’
shipping containers. Rates have reduced by almost 70% from the peak recorded in September
2021. Suppliers and contractors will need to become more competitive with their pricing as
demand falls off.
Rising Demand for Rentals, Condos and Townhomes
The surge in interest rates will spark an increase in the demand for rentals as buyers will struggle
to qualify for mortgages. This will further reduce the historically low vacancy rate the Okanagan is
experiencing.
Things might work out for potential homeowners eventually as market experts forecast the
overnight rate to level off in 2023 at 4% with rates easing in 2024. However, in the short term those
that choose to pursue home ownership will be pushed into more affordable product such as condos
and townhomes or bring larger down payments.
Those that buy in pre-sale developments (typically investors) will not be affected by the high
interest rates as projects typically take 2-4 years to complete. The mortgage they, or their contract
assignee, will acquire at closing will be at these anticipated rates. Since investors are typically
speculating on prices moving higher, they may be less active than usual due to the uncertainty in
which direction housing prices will move.
Wrapping It Up
Based on how the high-interest rates are likely to impact development companies in the Okanagan,
one thing’s for sure – the hike by the Bank of Canada (BoC) favours the prepared. Experienced
developers that are sitting on cash will be able to weather high interest rates by deleveraging
projects that are built faster than others. And for those looking to enter the housing market, look for
opportunities in the townhome and condo market as demand will continue to provide upward
pressure on pricing.