Out of the box

High mortgage interest rates and hedging policy

Ismail Al Hammadi

June 14, 2022

In two separate reports during the first month of the second quarter of this year, Bloomberg and Reuters, according to data issued by the Canadian Real Estate Association and the US Department of Commerce, indicated a sharp decline in home sales in Canada and America by 12.6 percent. % and 26.9%, respectively, during April 2022 on an annual basis, due to the rise in mortgage interest.

In other statistics and studies by local financial and banking specialists and experts, it is expected that real estate loans in the country will witness an increase at the beginning of the third quarter of this year, after the Central Bank’s decision to raise interest rates.

The rise in the price of real estate loans comes due to its connection with the EIBOR rate.

This rise is likely to negatively affect the real estate finance sector, which plays a role in stimulating the sector and revitalizing the sales market, and is also likely to affect the value of real estate sales, as it must not be denied that more than 80% of real estate purchases are made through financing. and loans from banks.

Although these possibilities remain weak compared to the current market situation, the number of new investors who entered the sector, and the value of the sales transactions achieved during the current year, it is necessary to take caution and redress the situation before it occurs with new incentives and initiatives involving all activists in the sector and those in charge of it. .

Today, the market faces three types of challenges: high building materials prices due to global economic inflation and weak supply chains caused by the effects of the pandemic, high final construction costs, as well as the expected rise in the interest rate of real estate loans.

Three rises will contribute to the rise in real estate prices and affect market activity in general.

Any real estate market is governed by four main drivers: product quality, price, financing flexibility (the availability of financial liquidity), security and general economic and geopolitical stability, and all of these are available in the local real estate sector, as despite the rises in the average real estate prices during the current year, It is still acceptable and accessible to buyers compared to other global cities, and supported by the flexibility of real estate financing.

But if the rise in prices meets with the rise in interests, it may have an opposite effect on the direction of the upward market curve, and this is what we want to point out and alert to if the aforementioned possibilities are realized;

Therefore, the policy of hedging is obligatory in this case, despite the weakness of these possibilities.

• Real estate prices are still acceptable and within the reach of buyers compared to other global cities.

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