Impact of Interest Rates Increasing 100 Basis Points (1%)
The Bank of Canada just announced that they will be raising interest rates by 1%. This increase was higher than the expected 0.75% increase because inflation has been running at almost 8%, well above the bank’s target of 2%.
Mark my words, pre-construction condo prices are going up. When costs for builders continue like raw materials and labour continue to increase due to inflation and now financing costs are increasing because of rate increases, the developers only option is to pass the extra costs on to buyers. Otherwise, if the financials don’t make sense, BUILDERS WILL NOT BUILD! They are business and in no situation will they build at a foreseeable loss. The large developers are incredibly sophisticated, and they will take this opportunity to acquire land cheaply from those that are forced to sell.
I am confident that the BoC is going to overcorrect and force the Canadian economy into a recession (we got to 8% inflation under their watchful eye right?). Oil has already come down 20% and supply shortages are nowhere as bad as they were during the Covid lockdowns. Increasing labour costs and higher financing costs will reduce labour demand which will alleviate labour shortages.
If you’re an investor, simply don’t panic – this is part of the natural business cycle. Focus on projects that are completed years from now. This gives enough time for inflation and interest rates to normalize and come back down.
This was my same advice to investors during Covid – don’t sell and focus on projects closing several years from now to get away from any Covid related rental issues. If you followed my advice, then you’re easily up 20% on your purchase and your rents have increased over 20% from Covid.
I have projects closing in 2025, 2026 and even 2027 for anyone not trying to time the market.