How increased interest rates affected the rental market

Last week we posted about various reasons that have affected the housing market and created a decrease in the rental rates. Over the next few weeks we will comment on each of the factors more in depth. 

The first one we will talk about is the increase in interest rates. 

In 2020 covid spread around the world, slowing economies everywhere as everyone adjusted to staying and working from home. Governments around the world increased money supply propping up their domestic economies. The effect of all this spending was inflation, which increased to rates governments had not seen in years. When inflation increases governments seem to only have one course of action to bring it under control, which is to raise the bank interest rate. Raising interest rates causes the economy to slow by restricting the access to money being lent. The same money the government injected into the system to keep it moving is now being restricted.           

In April 2022 the Canadian government decided it had to raise interest rates to cool the economy. The first increase was a quarter percent increase. This would be the first of many increases through July 2023 and rates went from 1.5% to over 6% during this time.

The rapid increase in interest rates had a tremendous effect on the rental housing market.         

Rental and sales markets have a symbiotic relationship. When the sales market slows, so does the rental market. Increasing the interest rates slowed lending and therefore slowed the sales market causing people to move their product to the rental market increasing rental stock causing supply to out pace demand.

Interest rates were at extremely low rates for a long time in North America including Canada. Lower interest rates increase the ability for people to borrow money which encourages borrowing. The question is are lower interest rates good for the economy?. It helps businesses borrow money which in effect increase a bank’s revenue through lending, but it also increases cost for products and services, especially housing for end users.

We are now seeing a rapid decrease in rental rates due to the over supply of product and decreased demand. Interest rates have had a contribution to this lowering of rental rates, though they are only one of multiple factors why rents are declining.     

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