Today, December 7, the Bank of Canada (BoC) held a meeting to discuss interest rates. The decision was to raise rates by 0.5% again. We continue our historic year, since it is the first time that there are seven increases in the same year. These are the fastest interest rate hikes ever recorded in Canada. There is no time when rates have risen so quickly and so high, not even in the 1980s. The BoC continues to consider the Canadian economy to be in ''excess demand'' despite the fact that they expect economic growth to stop in this quarter and the first half of 2023. Inflation is at 6.9% (October figure). Inflation has been decelerating since peaking at 8.1% in June. Inflation calculated over 3 months is now only at 2.75%. This means that inflation has slowed down a lot in the last few months and that the annual figures should drop in the coming months. The bank's inflation target is 2% or less. However, there is a portion of the economy that is doing well, as the Canadian economy added 10,100 jobs in November. This is more than the 5,000 jobs that economists had predicted. Since the beginning of the pandemic there has been a lack of qualified personnel in almost all areas. This creates pressure on employers to raise wages to attract workers. Salaries have increased by 5.6% on average this year. The BoC fears this increase will keep inflation high for longer than expected. And that's why they act so aggressively. Today, gasoline has reached a low price for 2022. If the cost of energy is down, the cost of many goods and services will at the very least stop increasing and perhaps even decrease. One of the goods that is an early indicator of an economic downturn is the sale of cars. Car prices have started to come down and the time a car spends at the dealership before it is sold has increased dramatically. This means that the pressure on inflation has already diminished considerably.
If we look a little further than Canada, such as the United States or Europe, it becomes clear that the pressure on demand will diminish in the coming months. The US will most likely be in recession next year. Same thing for several European countries. Even China seems to be seeing its growth wane. All this will reduce the pressure on the companies to reduce the overall demand for goods and services and reduce the pressure on the companies. It will also give companies time to catch up on production deadlines and reorganize their supply chain. Which will reduce inflation here in Canada.
With this new rise the question becomes: is the BoC going too far? The answer is yes and no. Canada is in an excellent position to weather a global slowdown without going through a deep recession. However, the BoC will surely have to lower its rates to recalibrate faster than they expect in order to keep the slowdown mild. The BoC said in its press release that they will be more attentive to economic data to ensure that the balance between supply and demand is restored. This is really different from the last press releases which was more in the tune of ‘’We will fight inflation at all cost’’. It is therefore possible that they will take longer before implementing further increases or decreases depending on what the economic data will show. There is always a delay between a rate change and a change in economic data of 3 to 12 months. So there is a lot of effect from the previous rises that has not yet been captured by the current data. The next meeting of the BoC is January 25, 2023 and we will know at that time what they want to do. In my opinion at this meeting they will do nothing. There is a lot of economic data coming between now and then so we will see. The fixed rates have started to go down, so this might be the sign that we are near or at the top.
What does this mean for real estate? Depending on where you live, the magnitude of change can vary. Property prices are likely to decline, as we started to see in the latest November market update. Prices are still higher than 2021 but lower than prices from April to May this year. However, the closer you are to a large center, the less the effect will be. This means that you may lose some of the equity in your property from the peak, but still gain since your purchase. If you bought earlier this year, you may have lost some equity. I don't expect it to be long term. Because there is a lack of housing in British Columbia. Rising rates have also affected builders and developers and they have shut down and put a lot of projects on hold. Which means that in the future the problem will not go away. There are also plenty of qualified buyers to buy everything that is for sale, the price downturn is not expected to be deep and not to last long. So if you're worried about your home's equity, don't be. If you stay in your house for a few years, you will have paid off your mortgage and the market will return. The largest cohort of the Canadian population are millennials, and they are turning 30 at a very rapid rate. This group is the first real estate buyer's group. There are also over 430,000 immigrants expected this year and in 2023 and they will need housing. The BoC could very well cut the rate sooner (after March of next year) rather than later, if the market slows too much, or if it realizes it has created a deep economic slowdown. If the Bank of Canada also stops raising rates for a few months, people who want/need to buy will return to it, bringing the market back to the regular BC market. This means that if you are looking to buy a property, you may have a small window in which to buy a property with much less competition and a nicer price. It's not time to hide, it's time to act.
What is the impact on your mortgage and what to do for the future?
If you have a fixed rate mortgage, you don't have to do anything until renewal because your rate won't change. If you have a renewal coming up within the next 12 months, I will start the process as soon as possible by contacting me. If you are unsure when you need to renew, please contact me. If you have a variable rate mortgage but with a payment that remains constant (your mortgage is most likely with TD), the majority of you have exceeded your trigger rate. A full explanation of what a trigger rate is and what to do can be found in my blog here:
https://www.refinancebc.ca/post/variable-rate-trigger-rate-and-trigger-point
If you have a variable rate with a bank other than TD. A 0.5% increase will add about $30 per month for every $100,000 of mortgage to your payment. So if your mortgage is $500,000, your payment will change by about $150 per month. For all of my variable rate clients, the rate you currently have is possibly higher than a similar fixed rate mortgage. So for those who are starting to lose sleep over all these increases, now might be a good time to discuss converting from a variable rate to a fixed rate. Switching from one to the other is not necessarily a good idea for everyone. It is important to think about many factors before converting, such as your penalty risk, your term length, the bank you are at, etc. You have qualified at a rate of 5.25%. Your rate may now be higher than this rate. You are probably able to afford the higher payment but it may be difficult. Some banks will allow the amortization to be increased up to 40 years. This will effectively put your payment back close to the original payment. Best to contact me for more details. Most banks have not yet changed their prime rate; however, I expect this to happen within the next few hours/days. Your rate will only change when the banks change their prime rates. The payment will reflect the change next month if you pay monthly. If you pay weekly or bi-weekly, there should be no change for a few payments. If you would like to know your new payment amount, please email me with your current mortgage balance and payment frequency. With this information, I can calculate your new payment. To schedule an appointment to discuss your options: use this link: https://calendly.com/refinancebc/30-min-mortgage-updates .
If you have pre-approval with me on a variable rate. Your pre-approval is based on Prime minus a certain discount. As the prime rate will change for your bank, your rate will be 0.5% higher because your cashback is protected by a rate hold. However, your purchasing power may have changed. I will contact you with your case details later this week. If we have a rate hold for a fixed rate, this does not apply to you unless your rate hold is about to expire. I will contact you in this case.
If you are in the process of getting your mortgage approved. I will contact you in the next few days to explain what will happen.
If you still don't have a mortgage and are thinking of buying this year or early next year, I suggest you contact me as soon as possible to begin your pre-approval. This will allow us to maintain rates and protect you against future rate increases.
If you have any questions, please do not hesitate to contact me at 604-828-9864 or by email at simon@refinancebc.ca.
Sincerely,
Simon Bilodeau
Courtier Hypothécaire
DLC-Mortgage Negotiators
604-828-9864