June 7, 2023
The Bank of Canada has increased its key interest rate to 4.75%—a jump of 25 basis points—putting an end to a short string of rate hike pauses.
“Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high,” the central bank said in a statement issued on June 7, 2023.
“While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability.”
The Bank of Canada’s decision ended the “conditional pause” on rate hikes in place since March, which followed eight consecutive increases that had upped the central bank’s policy rate to 4.5% from the 0.25% rates experienced through much of the pandemic.
The announcement was keenly anticipated and quickly analyzed for meaning across Coldwell Banker Canada’s national real estate network.
Peter Kritz, Broker of Record at Coldwell Banker Peter Benninger Realty in Kitchener-Waterloo, Ont., said the news was not unexpected.
“The two red flags that I saw made the announcement not surprising,” said Kritz.
Those two red flags were stronger-than-expected GDP growth of
3.1% in the Canadian economy in the first quarter of 2023, along with a higher-than-expected uptick in inflation to 4.4% in April, he explained.
The Consumer Price index rose from 4.3% in March, the first increase in 10 months.
“There is still a demand for housing in Canada, especially in Ontario,” said Kritz. “People will still be able to sell their homes, but, perhaps, not for as much as earlier this year.”
Kritz did some quick math to illustrate his point.
“For someone who took out a $650,000 mortgage with 5% to 10% down, the price of the house, if it’s in Kitchener-Waterloo, would have to be $15,000 less to keep the same payment as yesterday,” he said.
Just about everybody—purchasers, people who are renewing, particularly those consumers who had short-term, fixed rates and those in variable rate mortgages—will feel the impact of the Bank of Canada’s interest rate hike.
That’s the view of Shaun Westlake, VP of Sales with Guiding Star Mortgage Group, which is affiliated with Coldwell Banker Canada.
“The unfortunate reality is that we continue to have a shortage of supply, so prices will likely be stable or even continue to climb making affordability that much more challenging,” said Westlake, who is based in Hamilton, Ont.
“Those with short-term fixed rates are going to feel the squeeze on their monthly costs once their mortgages come due for renewal, and those in a variable mortgage, well, their pain will continue.”
Westlake believes that many variable rate holders who have been trying to weather the rate uncertainty might now look at locking their rates in to confirm their monthly costs.
“Potential purchasers will likely be thinking short-term, fixed rates, though I would strongly encourage them to have their mortgage agent do a full comparison scenario looking at both a short-term and a more traditional five-year term to see which really would be the most beneficial to them,” he said.
Westlake added he was not surprised, but “somewhat disappointed” by news of the rate hike.
“I think the Bank of Canada is trying to show they are committed to their policy, but at what cost to Canadians?” he said. “While the economy has shown some modest signs of growth, my bigger concern is mid-term impact of the rate hike on the average Canadian.”
“It hurts buyers”
Mariana Cowan, who is the President/Owner of Coldwell Banker Supercity Realty in Halifax, N.S., said the rate hike was “disappointing,” adding that it “hurts buyers.”
Rising interest rates decrease the buying power of those looking for homes, said Cowan, reducing some to lower-priced segments of the market and removing others from the market entirely.
“Ultimately, we still don’t have the needed housing supply on the market,” Cowan said. “People who can afford it are still going to purchase instead of renting at high rents, but it’s tough on many looking to buy, especially those who are just getting into the market.”
Last year, Halifax was the second-fastest growing urban region in Canada, a trend Cowan says will continue.
“With Halifax and Nova Scotia being a great place to live for many reasons, I think we are still going to see continued growth and demand here for housing,” Cowan said.
“Until we have more housing, I think there will be upward pressure on housing prices—people need a place to live,” says Cowan. “We are starting to see more arrangements of families, friends, living together for this reason.”
Cowan explained that less disposable income for people means they will have to make more conscious decisions with their budgets.
“For those who take a wait-and-see approach—for if and when interest rates drop—they could be competing with everyone else doing the same thing, which could drive prices up at that time.”
Coming to terms with rate hikes?
Ryan Lefebvre, Broker at Coldwell Banker Lifestyle in Cold Lake, AB., said he felt that some consumers are coming to terms with the new borrowing levels now that it has been over a year since the rate hikes started.
“We will see if this new increase will significantly affect the Government of Canada Bond Yields and increase fixed rates, but, in my opinion, most people are electing to go with a shorter-term mortgage in the hope that rates will come down in the next 24 months,” Lefebvre said. “I expect this to continue.”
Lefebvre predicted the central bank’s rate hike will continue to put pressure on an already tight rental market.
“Some people may choose to wait to purchase a home and those homeowners and investors renewing mortgages will be passing that additional borrowing cost onto the tenants.”
“An extra burden”
Jay Hundal, the Broker/Owner of Coldwell Banker Universe Realty in Surrey, B.C., said he had expected a jump of 25 basis points in the Bank of Canada interest rate, but thought it might come later in the summer or the year.
“This is an extra burden on people who really want to buy but cannot enter the market,” said Hundal. “Costs are going up, wages aren’t going up, but people still need a place to live.
“We hope the interest rate hike will stay now where it is and not go any higher.”
Closing thought: where would you like to live?
Coldwell Banker Canada’s Peter Kritz said he is increasingly intrigued by the possibility, for those in position to capitalize on it, of home ownership in a time of interest rate uncertainty and remote work.
That’s why he routinely asks about internet connectivity in smaller markets near Kitchener-Waterloo.
“Some people might now look to move to communities where the average price is less, but the internet connectivity is good,” he said. “In small town Ontario, fibre connections are being installed and if you are able to work from home, you’ll be able to currently buy for less. There are trade-offs, but it is a real question: where would you like to live?”
The Bank of Canada is scheduled to make its next interest rate decision on Wednesday, July 12, 2023.