Hi Clients, Friends and Neighbours!
There has been a lot of heat in the media in the last weeks re, interest rates and the Federal Budget so we thought now would be a good time to offer a quick review of what all this may mean for real estate markets across Canada.
First up, interest rates.
As you know Canadian mortgage rates have already begun to rise. This trend is expected to continue in the coming months.
Why are rates rising?
The Bank of Canada is raising rates in response to rising inflation, currently running well ahead of its 2 per cent target, the highest rate of inflation in close to two decades.
The high rate of inflation points to economic recovery from COVID 19 where consumer demand for goods outpaced the global supply chain’s ability to meet demand. Further exacerbating global supply chain issues is Russia’s invasion of Ukraine. Also, unemployment levels have hit a record low, creating a severe labor shortage across the country.
With regard to Real Estate specifically, the Bank raises its overnight rate to help spur a drop in home sales and flattening of home prices, which have risen approx. 20% over the last year. However, with markets so out of balance it will take a substantial decline in demand to return active listings to healthy levels.
The Bank has signaled interest rates will need to rise further and the timing and pace of future increases will be guided by ongoing assessments of the economy.
How will this impact buyers and sellers?
The British Columbia Real Estate Association anticipates the most likely outcome of rising rates will be home SALES falling closer to their historical averages over the next 2 years – but with such low levels of supply, its unlikely to affect home PRICES in a significant way.
The decline in home sales and the potential decline in home prices will depend on the final destination for Canadian mortgage rates … and the presence of the mortgage stress test could complicate economists ability to make projections over the coming months.
On inflation, the bank anticipates inflation to gradually decline from its current 6 per cent rate to 2.5 per cent by the second half of 2023.
Next, the Federal Budget.
The federal budget has promised $10 billion to make housing more affordable. Measures include tax credits for a variety of items but those that stand out for us are …
- A 2 year ban on foreign buyers
- Sales tax on contract assignment sales
- No principle residence exemption of capital gains tax on properties bought and sold within 12 months
- A national plan to end “blind bidding”, the inclusion of a legal right to a home inspection and transparency of home sales data for the consumer
- Increased incentives for first-time home buyers through a new tax free savings account
We anticipate the above measures will result in more than a few changes in the real estate market however, they are not effective yet.
More to come in the next few weeks.
Jenn & Colin