This morning, September 6th 2023, the Bank of Canada (BoC) announced that it will be keeping the interest rate steady at 5.0%, marking the second period of pause. This decision is significant in the context of recent efforts to control inflation.
Inflation has been a concern for policymakers and consumers alike, and the Bank of Canada has been working to bring it under control. The decision to keep interest rates steady is part of this effort, and the Bank of Canada expects inflation to ease in the coming months. It has set a target inflation rate of between 1% and 3%, but in July inflation was measured at 3.3%. Slightly higher than in June. We will need to see the next set of data to decide if the downward trend is continuing or not. This trend did not take account the last 2 rate hikes of June and July. It takes a few months for the effect of the interest rate change to start taking effect, and over a year to take full effect. There will be also a significant lag effect because a lot of mortgages are either fixed rate for 5 years or variable rate but with fixed payment. This means that a large portion of the mortgage are not yet affected. For the people with a variable rate this may come sooner rather than later. See the link below for what may happen to your mortgage soon.
The Canadian economy has slowed down in the past 12 months. In the second quarter (April, May and June) the economy contracted by 0.2%. The unemployment also ticked upward to 5.5%. This means that the risk of inflation growing significantly again is relatively low. However, the BoC will keep an eye on the data and make sure that they will act if inflation wants to return. At this point, we should not expect the variable rate to decrease before at least next year and even June or July 2024. They want to make sure that inflation will not come back. The next meeting will be on October 25th 2023.
For your mortgage, this is great news. There is no change. If you have a preapproval you are more likely to have a fixed rate than a variable rate, so, there is no change for your qualification amount either.
For those planning to buy, I suggest starting sooner rather than later. The fixed rates have been going up for some time but seems to have stabilized to a 22-year-high. The effect of those higher rate on the property value is still unknown at this moment, but we may see a small downward trend on the price of the properties. I’m not expecting a large movement in price because inventory (the number of properties for sale) is low and there are enough people ready to buy even with those prices and rates. So, unless a huge wave of sellers joins the market, we should see a market that will be flat for the year. On more point, Statistic Canada may have undercounted the Canadian population by as much as 1 million people. This obviously puts pressure on the real estate and the rental markets, significantly increasing demand, which is a factor that will keep housing expensive.