I would like to share with you the latest news regarding the Bank of Canada (BoC) and its recent decision to once again raise interest rates. This significant measure reflects the central bank's belief that the previous monetary policy was not restrictive enough to restore the balance between supply and demand and to sustainably bring inflation back to its 2% target. As a result, the target for the short-term interest rate has been increased by 0.25%, now standing at 5%. The BoC has revised its estimates for returning below the 2% inflation mark to the middle of next year, indicating that there will not be a decrease in rates for some time. The BoC will now closely monitor economic data as they aim to avoid creating larger-than-necessary economic issues to reduce inflation. The next meeting is scheduled for September 6th.
The Canadian economic landscape has performed better than anticipated, but there are several signs of economic deterioration. Firstly, inflation currently stands at 3.2% (compared to 8.13% at the same time last year). While GDP continues to grow (3.1%), per capita GDP has decreased to $52,722 compared to $55,085 in 2022. The reason for this decline is simple: we have increased the Canadian population by 2.8% in 2022 and continue on the same trajectory this year. We have now surpassed 40 million inhabitants, meaning our real economic growth is far from impressive. Unemployment has risen and currently stands at 5.4%, representing a 0.2% increase and the second consecutive monthly increase. Regarding the real estate market, the lack of available properties had exerted upward pressure on prices, but preliminary data from June reflects a stabilization of the market. The BoC is aware that interest rate hikes take some time to take effect. In general, the majority of the effects occur between 3 and 6 months, but some effects may take more than a year. This means that we have not yet seen 100% of the effects from the majority of the hikes. One component that takes much longer is property construction. Large projects can take 5 to 10 years to complete, while smaller ones can take 2 to 5. Currently, the number of new construction permits is declining, indicating that we will not build enough units to catch up with the unit deficit, let alone meet the needs of our growing population or stabilize prices. But this in turn will result in layoffs and slower demand, which reduces inflation.
You may be wondering about the implications of this decision on the real estate market. With fixed rates also increasing by more than 1% in recent weeks, we will see a slowdown in the market. As the number of properties available for sale is very limited, this will help rebalance the market, creating an opportunity for buyers. I hope that sellers will not completely withdraw from the market. If you had planned to purchase a property this year, I recommend getting pre-approved now to take advantage of the current rates and explore opportunities in a potentially less competitive market.
Borrowers with variable rate mortgages will be directly affected by the BoC's decision. If you find yourself in this situation, you can expect an increase of $15 per $100,000 of mortgage loan. For example, for a $500,000 mortgage, you will see an increase of $75 per month. However, if you have a variable rate mortgage with a fixed payment, your monthly payment will remain the same, but a larger portion of it will go towards interest. For the majority of my clients, with this increase, you are currently only paying a portion of the interest. This means that the principal of your mortgage will increase rather than decrease. It is important to note that there is a limit to this increase, known as the trigger point. Therefore, it is essential to take action before reaching this point. You can do three things: 1) Increase your payment to cover the interest, 2) make sporadic additional payments to maintain the balance of your mortgage, or 3) switch to a fixed rate mortgage, where the new rate and payment will allow you to start paying down your mortgage.
If you have any questions or would like to discuss your specific situation, I encourage you to contact me at 604-828-9864. Please note that if you have a fixed rate mortgage, there will be no changes for you until your renewal date. If your renewal is due within the next 6 months, I will be in touch to discuss it with you. As for pre-approvals, they are all based on a fixed rate, meaning there will be no changes in your purchasing power.
If you need to contact me, please don't hesitate to call me at 604-828-9864 or schedule an appointment using the link below.