Interest Rates Raised to 5%
Today the Bank of Canada (BOC) raised it’s overnight lending rate for the 10th time to 5% - the highest rate in 22 years! This is a punch to the gut for anyone that has a mortgage or is considering buying a property.
What is Happening?
Inflation has slowed considerably to 3.4%, but it is still well above the BOC’s target rate of 2% and the Bank of Canada wants to hurt you … hurt your wallet I mean. The labour market is still creating jobs, consumer spending on goods and services is still high, and housing demand continues to expand. The BOC is being aggressive and wants all of this to slow down and would rather cut rates aggressively later instead of not increasing rates enough and trying to “catch up” later.
What is Driving This?
Energy prices have come down, global inflation is coming down, and supply shortages are easing so what gives?
Increasing interest rates are driving higher borrowing costs (up nearly 30%) especially in the housing market which seems to be a vicious cycle - higher interest rates cause inflation which needs to be met with higher interest rates which causes more inflation!!
A larger factor though is immigration - strong population growth is adding both demand and supply to the economy. Newcomers are filling job vacancies and helping to ease the labour shortage but are boosting consumer spending and adding to the demand for housing.
Companies are greedy and are causing the inflation of goods and services. Under the guise of high inflation, companies are able to get away with raising prices to increase their profits. It’s happening all over (especially with grocery stores), but many large corporations are taking advantage of this opportunity to increase profits at the cost of the average person
What is Next?
The average mortgage rate being paid by people right now is 2.8% while the current 5 year fixed rate is closer to 6.5%. This means not even half of the interest rate increases have been felt yet - most people on variable rates haven’t had their payments adjusted and fixed rate mortgages won’t change until they renew, likely still in a few years. Something has to give and soon - there is simply too much debt in the economy today and high interest rates will cripple the economy, sooner than later. But based on the aggressive stance of the Bank of Canada, maybe that’s the point?
Many called this rate increase unnecessary and I agree but the market is giving a high probability of another 0.25% rate increase in September. The decision will be made by the inflation and economic numbers that come out over the summer so it will be interesting to see how this develops!
Contact me if you want help navigating the current real estate environment and my outlook for the next 6-12 months. I’m still bullish on Calgary, especially for projects closing in 18 months or more - the farther out the better!