The dynamic interplay between inflation, accelerating interest rates, and their impact on the real estate market has unfolded in a way that diverges from the Bank of Canada’s (BOC) intended outcomes. This prompts a deeper exploration beyond mere news headlines to comprehend the ramifications for Ontario’s homebuyers, sellers, and the overall real estate landscape.
Inflation Trends – July’s Increase Surpasses Expectations
Examining recent months, June witnessed a notable decrease in inflation, settling at 2.8%. However, July marked an unexpected shift as inflation rose to 3.25%, primarily attributed to escalated mortgage payments and energy expenses.
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Surge in Mortgage Payments
Even though the BOC paused rates on September 6, we will continue to see mortgage payments increase as around a million Canadians renew annually. Upon renewal, payment hikes will range from 20% to 50%. Increased mortgage payments subsequently cause a ripple effect, resulting in higher rents. Landlords are compelled to raise rents to offset the increased mortgage burden. This phenomenon has pushed the average rent in Canada to a record $2,078 in July, with a yearly surge of 8.9%. Elevated interest rates increase housing costs and consequently drive inflation.
Energy’s Role in CPI Inflation
Energy costs also contributed to July’s inflation uptick, largely due to the comparison with prices from the previous year. Gasoline substantially dropped in July 2022 (-9.2%), but that significant drop no longer impacted the overall year-over-year price change. The introduction of the 2nd Carbon tax on July 1st this year led to increased pump prices, particularly noticeable in Nova Scotia, with a 14% monthly surge. Alberta faced a striking 127% electricity cost increase, attributed to heightened demand due to warm weather, a 5% population influx, and the removal of Alberta’s electricity rebates. The Federal government’s focus on climate change and elevated energy costs pose a challenge to mitigating inflation. Due to the volatility of energy, the BOC places significant attention on Core Inflation when determining interest rates.
Core Inflation – Encouraging July Dip
BOC places emphasis on Core Inflation, which excludes energy, food, and indirect taxes like HST, carbon tax, and payroll taxes. July witnessed core inflation at 3.42%, down from June’s 3.52% and a significant decrease of 38.9% from July 2022’s 5.53%. This should bolster the BOC’s confidence in the economy’s softening.
Unemployment – July’s Uptick
Canada’s unemployment rate rose slightly for the third consecutive month, reaching 5.5% from June’s 5.4%. Lagging job creation in comparison to immigration influx is a contributing factor. There were 6,400 job losses, particularly in the construction sector. Though unemployment isn’t rising as high as desired, and we are still in a tight labour market, this trend might be sufficient for the BOC to consider a pause in interest rate hikes come September.
Builders and Project Delays
The Canada Mortgage and Housing Corporation (CMHC) reported a 10% yearly decline in construction starts from June. This decline is concerning, especially amid Canada’s mounting housing crisis and the projected influx of 500,000 immigrants yearly. Even smaller towns like Guelph, Ontario, are witnessing the emergence of homeless encampments. Construction costs have risen, and higher interest rates deterring potential buyers have been the driving force behind project delays.
Housing Affordability
Anticipated housing supply growth in 2030 is expected to fall short of demand, exacerbating housing affordability challenges in Ontario. With a pressing need for more homes, particularly in Ontario, where 1.85 million homes are required, achieving the current targeted 1.5 million by 2031 appears doubtful. Builders’ challenges and opposition to utilizing greenbelts for housing adds to the housing gap and will worsen housing affordability unless solutions are imminent.
BOC’s September Decision
The BOC decided to pause interest rates on September 6th. This was mainly due to the September 1st announcement that the Canadian economy slowed in the second quarter by .2 percent, faster than the BOC expectation of 1.5% GDP growth. Tiff did leave the door open for another hike at one of the two remaining announcements this year. We anticipate that quarter 3 GDP will continue to slow, and the BOC will pause for the rest of the year. Some analysts even say we could see interest decrease in the first quarter of 2024.
Should you invest in real estate even when times are uncertain? The following resources will give you some background knowledge:
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Housing Projection for 2023’s Remaining Months
The September interest rate pause should yield a more typical fall real estate market. Home sales should experience a slight increase compared to the summer months. Prices typically witness a rise in September through October, followed by a dip in late November, with a subsequent rebound in late January. Given Ontario’s growing population, property scarcity, and rentability concerns, the latest housing price dip is likely temporary, and a gradual increase in housing prices is anticipated over the years.
Any questions about how inflation is affecting the real estate market? Feel free to reach out!
