Bank of Canada Raises Rate to 5%. A new normal?
It is time to wait 6-12 months then buy in 2024-2026?
The Bank of Canada has taken a bold step by raising its overnight lending rate to 5%, reaching its highest level in over two decades. This move comes after a consecutive 0.25% increase for the second month in a row. The bank cited projections of Consumer Price Index (CPI) inflation remaining around 3% for the upcoming year, gradually declining to 2% by mid-2025, indicating a slower return to target compared to earlier forecasts.
Experts in the industry, including economists from the Canadian Real Estate Association (CREA), had foreseen this rate hike, but earlier in the year, it seemed that the upward trend had paused. However, this “pause” came to an end in June with a surprise 25 basis points hike, followed by the recent announcement of another 25 bps hike to bring the lending rate to the current 5%.
Bank of Canada Governor Tiff Macklem explained that the decision was motivated by two key considerations: persistent underlying inflationary pressures and the need to strike a balance between the risks of under- and over-tightening monetary policy.
The impact of this rate increase will be felt by both homeowners and home buyers. For potential home buyers, it means higher borrowing costs, potentially affecting their affordability in the real estate market, which has already been experiencing increased home sales and a lower-than-normal supply. Nevertheless, the recent rise in newly listed properties is a positive sign for buyers.
Existing homeowners with variable-rate mortgages will also see an increase in their mortgage payments, while those looking to renew their mortgage might be surprised by the higher rates compared to the exceptionally low rates seen in previous years.
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CREA’s Senior Economist Shaun Cathcart expressed concerns about the cumulative effect of interest rate hikes and the potential strain it may place on some mortgage holders. Even a modest increase in interest rates can have a significant impact on the housing market.
As for the average Canadian homeowner, a 10% down payment on a $700,000 home with a five-year fixed-rate mortgage would translate to an additional $100 per month due to the recent interest rate hike.
Looking ahead, there are uncertainties about whether more interest rate increases are in store. The statement accompanying the recent decision did not hint at a pause, and the next rate decision is scheduled for September, keeping homeowners and buyers on edge.
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