For the first time in 20 years, The Bank Of Canada has enforced a 0.5% increase in its interest rate, making it the highest single move ever. However, the coming days promise to bring even more increment to tackle the looming inflation partly influenced by the ongoing war in Ukraine. As much as this preemptive move by the government is applaudable and fundamental, there will be short term consequences for both individuals who have taken up a ton of loans due to the low-interest rate and various industries that the interest rate controls such as the real estate market.
As a result of the pandemic, Canadian households raked in a whopping sum of $300 billion in total savings. The majority of these savings were invested into real estate, as households took advantage of the low-interest rate that was in place at the time. Now that the hike in rate is imminent, analysis suggests that the real estate market’s growth will witness a significant decline in demand and prices.
This analysis has been proven before, especially between 2017 and 2019, when the cycle of activities were ample. During this period, the Bank Of Canada had increased the policy rate to 1.75% from 0.50%, while household interest pushed to 4.37% from 3.72%. This growth in policy rates caused the demand for homes to reduce substantially during those years, while the annual gain in home prices, which was between 13-19%, declined to almost nothing.
However, after the pandemic struck the world, various countries found different means to manoeuvre the damages that COVID-19 hauled. This realisation compelled the Bank of Canada to reduce the policy rate subsequently three times in just one month. As of March 2020, the rate went from 1.25% to 0.75% before finally dropping to an all-time low of 0.25%.
The policy rate had remained within minimal percentages since then, up until March 2022, when the Bank of Canada increased the policy rate for the first time in 4 years, as the last increment occurred in 2018. Not only is this 0.5% hike regarded as an unusual one, given that there hasn’t been an increase in recent times. It is also dubbed the highest single move in the history of interest rates.
According to the speech of the deputy governor of the Bank of Canada, Sharon Kozicki, as cited by BMO economists, more policy rate increases should be expected as the central bank claims to be prepared to act forcefully in a bid to subdue inflation. The Canadian Imperial Bank of Commerce, in one of its recent forecasts, predicted that interest rates could go as high as 1.25% before the end of 2022 and might go up to 2.25% by September 2023.
How Does The Increase In Policy Rate Affect The Real Estate Market?
This rise in interest rate is already evident in the estate market as demand for houses in the highly sought-after Greater Toronto Area has reduced considerably in recent weeks. This observation was put together by Nasma Ali, the CEO of Broker One Group. She claims that the showings she has been getting in the past weeks have reduced tremendously from over 100 plus to 5/6 in a week.
Another precise observation that prescribes an increase in the policy rate will have an enormous impact on the real estate market was elucidated by the co-founder of Ratehub.ca, James Laird. He claims that it is without an iota of doubt that the prices of homes will most definitely be reduced because the primary factor that helped boost the prices in the first place was the low policy rate that was put in place due to COVID-19.
Also, Hilliard MacBeth, an author who had written a book about how the real estate market in Canada was faced with an imminent collapse in 2015, has come out to assert that his predictions are bound to come to reality in the coming months. He claims that his forecasts might have been too early when he wrote the book but were not wrong. Hilliard further stated that with the current policy rate and the forecasted increments to follow, his conviction that the “housing bubbles” will burst soon has been bolstered.
After barely surviving the damages impacted by COVID-19, most countries were yet to recoup fully before the emergence of the war in Ukraine, which has also contributed to the inflation that promises to affect the world. Several countries have no choice but to fight off this inflation through whatever means they can.
Unfortunately, by doing this, residents of the country may experience various discomfort, as seen in the case of Canada, where the rise in the interest rate is vital to helping it sustain itself against the inflation that looms. At the same time, this increase in the policy rate will remarkably slow down the activities of the real estate market.