The Bank of Canada’s aggressive 100 basis point increase to the overnight rate in July was higher than the 75 basis points most analysts predicted. Its impact on people with variable mortgage rates was immediate. Fixed rates are also increasing even though they follow the bond rate and not the BOC rate. The real estate market’s response was swift, with prices dropping by 6% in Canada.
Even smaller cities like Guelph saw the price of detached homes drop by 8%.
Inventory rapidly increased while buyers paused, causing the number of sales to plummet. It sounds like doom and gloom, but if you look beyond the headlines, it is not.
Are we in for another significant correction when the BOC announces another increase on September 7th?
The projected increase is expected to be 50 to 75 basis points. Although this increase is sizable, I don’t think the impact will be as severe, and here is why. In July, the BOC rate increase was higher than expected, and the reaction is more significant when an event is more exaggerated than your expectations.
The public’s confidence in inflation being under control any time soon started to crumble. That cat is out of the bag, and people are now more aware that we will likely be in a period of high inflation well into 2023. The USA announced a decrease in inflation for July.
But even if these decreases are maintained over the next several months, which is quite optimistic, it will take a long time to get inflation back to the 1 to 3% target. In reality, we will more like be having some good months and some bad months as we journey back to normal. Having said that, since people’s expectations have been ‘reset”, I don’t think the next BOC interest hike will have the same effect.
Learn more about the Guelph real estate market with some of these other excellent resources:
- Blog Category: Guelph Real Estate
- The Key to Selling Guelph Real Estate in a Recession
- How Downsizers in Guelph can Capitalize on a Changing Market
Should you go for a variable or fixed mortgage right now?
5-year variable interest rates have already jumped 300% this year from a low of .85 to the current 3.5% rate. In the same period, the 5-year fixed rate has increased by 85%, sitting at around 4.34%. The gap between fixed and variable continues to shrink.
According to CMHC, 56% of Canadian chose variable mortgages in the first six months of this year. I predict we will see more Canadian locking into fixed mortgages more frequently. However, I believe if you have the surplus cash to make higher payments than the current rate requires and have a higher threshold for risk, variable over the next 3 to 5 years will be the better route.
If you want to be safe, front load your variable mortgage with higher payments than needed (meaning you will be paying off more principal), so as rates increase, you will already be used to the payments.
Fixed-rate mortgages may suit you better if you are more comfortable knowing the exact amount of your payments. I would recommend only locking in for three years as I predict the variable rate will come down at the end of 2023.
Why is the outlook for Canada and housing optimistic?
Currently, there are some temporary factors and long-term trends influencing inflation. The temporary factors are Covid 19, locking down the economy globally, and creating colossal supply issues that will take some time to restore. The Ukraine/Russia war further led to supply chain issues, causing increasing prices and inflation.
These two events have added fuel to the inflation fire, but the fire was already there. Our aging population was already shrinking our global workforce causing wage increases and contributing to inflation.
I believe we should be extending the retirement age, people are living longer, and we need to work longer to ensure we will have enough money to last our lives. But then again, I love working. The continuation of technological and AI advances will allow higher efficiencies and offset the shrinking of the global workforce.
Canada attracts a lot of immigration, which will counterbalance some work shortages. This, in turn, allows us to contain wages and keep inflation from running away.
My predictions are:
- Our supply chain issues will return to normal as the world opens up.
- Interest rates will continue to increase for the next while but not at the rate we’ve seen over the last few months.
- Demand will remain strong for housing, and people will adjust to higher mortgage rates than we had during the previous two years, as rates are still historically low.
- Immigration will also contribute to continuing demand.
- Real Estate will start bouncing back in the next six months. It may continue to drop for a few more months but at a much slower pace, despite the continued interest rate hikes.
Are you getting ready to buy a home in Guelph this year? Check out these blogs to get inspired:
- Buying an Older Home? Here are the Red Flags to Watch For
- Will a Shifting Market Help Millennial Buyers?
- How to Generate Passive Income from Your Primary Residence
Is now a good time to buy?
The current market is ideal for first-time buyers, investors, and those who are moving up. Contrary to popular belief, this market is the best for upsizers. With a significantly smaller gap, you can buy the house of your dreams.
Prices are fair, the supply is plentiful, and first-time buyers have a great chance to enter the market.
Investors have the unique opportunity where we see housing prices down but rents up. It isn’t the ideal market for downsizing or people leaving the market so it will come down to lifestyle and an equity choice.
Are you looking for solid real estate advice? Contact us today right here to learn more about how we can help.
