How Will Rising Interest Rates Impact Condo Sales?

Rising interest rates are expected to have a significant impact on the condo market next year. According to a recent report from Polaris Pacific, condo sales volumes dropped significantly in October as a result of high pricing pushing some buyers out of the home buying market. Next year, rising interest rates could likely put downward pressure on condo prices in Los Angeles, and it could lead to a declining market.

“Increased rates will play a significant role in shaping both buyer sentiment and affordability,” Mike Akerly, VP and regional manager at Polaris Pacific, tells GlobeSt.com. “That, in turn, could have an impact on the pricing trajectory. It is likely that there could be a pullback in the rate of appreciation or even a slightly declining market.”

Rising interest rates have an impact on condo sales both because of buyer’s perception of increasing interest rates and their impact on the economy and on affordability, according to Akerly. “Many current home purchasers have become accustomed to the low, roughly 4% rates that we have enjoyed for the past six years,” he explains. “The 90+ basis point increase we have experienced in the past year is surprising to them even though they are still extremely low when compared to the average of the past twenty years, which is closer to 5.5%. But rates are likely to continue to inch up through 2019, and eventually, the new normal will be accepted by the market and buyers will no longer see these rates as unexpected or likely to retreat.”

On the affordability side of the equation, rising interest rates actually decrease buying power and should naturally decrease pricing. “From an affordability standpoint, a 100-basis point increase in rates translates to an approximately 10% reduction in purchasing power,” says Akerly. “In other words, if you could afford an $800,000 condo when rates where at 4%, you will qualify to purchase a roughly $720,000 condo when rates are at 5%, all other things being equal. Current market pricing has not priced-in substantially higher interest rates.”

Next year, Akerly anticipates a slow down in pricing growth as a result of rising interest rates. Simultaneously, he also expects condo supply to remain in seller’s favor. “I anticipate that 2019 will bring with it a pull-back in the rate of pricing growth as sellers adjust to the new dynamics of the market,” he says. “Inventory will likely still remain at or below balanced market levels of six months or less, but will continue to grow from extremely low levels that heavily favored sellers in the recent past. Barring any major changes in the macro economic environment, which most economists are not expecting next year, or unforeseen geo-political risks, I expect that demand will remain at healthy levels as will overall condo sales activity.”