Bank of Canada
- The Bank of Canada raised the benchmark overnight rate to 3.25% this month. Over the past seven months, the overnight rate has moved from 0.25% to 3.25%.
- We are expecting at least one more rate increase before the end of the year, likely at the end of October.
Current Economic Climate in Canada
- The current economic climate is characterized by high inflation, historically low unemployment and significant job vacancies.
- While supply chain issues will eventually subside, tight labour markets across the country are pushing up hourly wages, which is exerting inflationary pressure.
Inflation – Changing of the Consumer Price Index
- The rate increases are intended to slow down purchasing power as inflation soared to 8% over the summer. The Bank of Canada has a targeted range of around 2% for inflation (grey area)
- High inflation has been driven by the energy sector, travel and food prices.
- This week the Bank of Canada reported inflation reducing to closer to 7%.
- Economists are predicting we are over the peak and headed in a downward trend. It will take some time for inflation to get back to comfortable levels.
Outlook for Interest Rates
- As inflation has started to decline, it is expected the next rate increase should be the final one for this cycle.
- The Bank of Canada will likely plateau the rate at around 4% and hold for a year to two years.
- We do not expect the central bank to start cutting rates until inflation drops to under 4%.
What Does this Mean for Buyers?
- Economists predict interest rates to peak in late 2022 but remain constant for up to two years.
- This will put downward pressure on housing prices as buying power in the market is reduced.
- A good mortgage broker is very important during these market conditions. As is a good Realtor 😉
What Does this Mean for Sellers?
- Home prices during the pandemic increased well above historic levels (circled area).
- As inflation reduces, interest rates will begin to decline and home prices will increase again, likely at prepandemic levels.
- The good news for sellers in the current market is the historically low levels of inventory have continued.
- Low inventory is helping sellers move their homes, with adjusted expectations for days on market and pricing
In Conclusion
- In the short term, we expect high interest rates to supress activity in the housing market, which should lead to softening of prices.
- In the long term, rising interest rates will slow new development as projects become delayed, reducing new supply in the market. As we are moving into a period of above average population growth. In order to meet this population demand, this would require 20% more net housing completions than we have seen over the recent past. This will increase demand significantly.
