Today, the Bank of Canada (BoC) held a meeting to discuss interest rates. The decision was to increase rates by 1.0%. This increase is historic since it is the first time that three increases of 0.5% or more three months in a row. The Canadian economy continues to perform well and is still considered to be in ‘’Excess Demand’’. However, the economy as shown sign of slowing down in the last job report where 43K jobs in June. The flash GDP number of May showed a deceleration of th growth of the economy. Inflation is at 7.7%, a level not seen in the past 30 years. The bank's inflation target is below 2%. So, what they are trying to do is remove the excess demand from the economy. With this rate hike the BoC as now an overnight rate at 2.5%. This is what they consider to be the neutral zone (between 2 and 3%) which means that the interest rate will not be boosting nor shrinking the economy. However, nobody really knows what the real rate should be to avoid crushing the economy while removing the excess demand. A lot of factors can influence what that rate should be, which include the level of debt of the households, economic growth and economic confidence (which is consumer sentiments). The hikes that they did takes between 3-6 months to show full effect, but can be faster when the average consumer chose a cautious approach of wait and see before opening their wallet. The super rate hike of today may as well just be a shock and awe strategy. They are trying to push more people to reduce spending by fear of higher rate and inflation than their budget can really do. The idea that they have is clearly to reduce demand in the short term to help companies still grappling with production issue to catch up. Many countries are doing the same thing with the same idea. This should reduce global demand and help with worldwide inflation. Governments should also pitch in and reduce their spending, which would reduce demand rapidly and also help with the worker shortage.
What does that mean for real estate. Depending on where you live, the amplitude of change may vary. There is a risk that real estate price goes down, as we started seeing in the last market update. However, the closest you are from Vancouver and Victoria, the least effect you should see. The lower price will be recorded from the highs of March-April 2022 which are 15-20% higher than the prices from March - April 2021. This means that you will lose equity on your property, but still have gained since your purchase. If you purchased in the last few months. Your mortgage payment should keep your equity mostly intact. I do not expect this to be for the long term. Because there is a lack of supply and plenty of well-qualified buyer to purchase everything for sale, the softening in price should not be deep and not be for a long period of time. So, if you are scared for your home equity, don’t. If you stay in your home for a few years, you will have paid down your mortgage and the market will come back. The largest cohort in the Canadian demographic are the millennials, and they are turning 30 at a very high rate. This group if the prime buyer of real estate. The BoC may very well be pushing the rate down sooner (early next year) rather than later, if the market slows too much, or they realized that they created a deep economic slow down. If the BoC also just stop raising rates for a few months, people will realize that they need to buy and just go back at it, returning the market to the regular BC market. This means that if you are looking to purchase a property, you may have a small window in which it will be possible to buy a property with a lot less competition and a more agreeable price. It is not time to hide, it is time to act.
When can we expect the next hike? The BoC has clearly indicated that they want to fight inflation at all costs. We have already had 2.25% rate hikes this year. The BoC does not want to send us into recession by rushing increases, but they are not ruling out the possibility of another increase in September. Economic data of the summer will give them the outlook necessary to take their decision. Looking at rate hikes in the past, of 1% is really rare and has often been followed by a drop a few months later. We just had three rate increase in a very short period of time. I will continue to monitor economic data and keep you informed. The next BoC meeting will take place on September 7th, 2022.
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 would start the process as soon as possible by contacting me. If you are unsure when you have 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), you don't have to do anything either. Your payment will not change as the interest rate increases. However, you'll see your rate go up, and you'll pay off your mortgage a little slower.
If you have a variable rate with another bank. A 1% increase will add about $48-53 per month per $100,000 of mortgage to your payment. So if your mortgage is $500,000, your payment will change by about $275 per month. For all my variable rate clients, the rate you currently have was well over 1% lower than the fixed rate at the time and is now over 1% lower than the current fixed rate. You should not be worried also. You were qualified at a rate of 5.25% meaning that you have the capacity to sustain the higher rate. I do understand that this is not easy. Even with the rate increase, you save money with every payment you make. At the time of writing this message the 5 year fix hover at 5.1%. The banks have not changed their prime rate yet; however, I expect this to happen within the next few hours/days. Your rate will only change when the banks change their key 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 are starting to lose sleep over this email, please contact me so we can discuss converting your variable rate to fixed rate. If you want 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.
If you have a 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 1% higher because your discount is protected by a rate hold. However, this time your purchasing power may have changed. I will be contacting you with details on your file 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, I suggest you contact me as soon as possible to start 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.
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