Let's Talk House Episode 14: Understanding Bank of Canada Interest Hike, Inflation and House Affordability

Let's Talk House Episode 14:  The cost of bringing down inflation is becoming challenging even for Bank of Canada as the country's economy remains strong with strong labour market demand.  This resulted in a 25 basis point increase that caught even the majority of economist off-guard. In anticipation for the rate hike, the prime rate, variable and fixed rate mortgages have gone up as well. Join us as we explore the far-reaching implications of the Bank of Canada's rate hike on homeowners and prospective buyers, shedding light on the evolving dynamics of the real estate market.

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Transcript

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In today's episode, we'll focus on the future of real estate and mortgages in Canada, as Bank of Canada surprised the majority with an interest rate hike on Wednesday, leaving many wondering what lies ahead for homeowners and prospective buyers. We'll break down the key details and explore how this move could affect homeowners and aspiring buyers like you. Only here at Let's Talk House, your go-to source for all things real estate, mortgage and beyond, in the Greater Toronto Area in Canada. Welcome home. I'm your host, Leigh Villar Cisneros. The Bank of Canada made a significant move on Wednesday by raising its overnight interest rate to 4.75%, the highest since 2001, marking an increase of 0.25% from April. This decision was driven by higher-than-expected economic growth in Canada during the first quarter and the belief that the existing monetary policy was not restrictive enough to bring inflation down to the desired target. The Bank of Canada's move indicated the concern about inflation and the need to maintain price stability. While higher interest rates may pose challenges for some homeowners, they are also a sign of strong economy. It's essential to remember that the rate hike comes after a period of robust GDP growth in Canada. However, this does not mean that the housing market dynamics may shift. We might see a slight slowdown in demand and price growth as affordability becomes more of a factor. Affordability is a key with mortgage costs rising. Potential buyers might face tougher lending conditions. It's crucial for individuals to work closely with the mortgage professionals to assess their options and ensure they are well prepared before entering the market. Looking ahead, how will this shape the future of real estate in Canada? The real estate market is incredibly resilient, and while the interest rate hike introduces new challenges, it doesn't mean doom and gloom. We may see a more balanced market in a slightly slower pace of price growth. The focus will shift towards sustainable and affordable housing options. It's also worth noting that the market will vary across regions, so local factors should be considered when evaluating the future of real estate. Flexibility and adaptability will be crucial. Homeowners and buyers should stay informed about the evolving market conditions and mortgage options. For instance, fixed rate mortgages can offer stability in a rising rate environment. It's a great time to explore the advice and expertise of mortgage professionals who can guide individuals through these challenges and help them make informed decisions. Leading up to this announcement, economists expressed concerns that the Bank of Canada might be compelled to raise interest rates given the ongoing inflationary pressures and recent G The Bank of Canada's decision to raise interest rates caught many off guard. This rate hike will definitely impact homeowners and potential buyers. Those with variable rate mortgages and HELOCs or Home Equity Line of Credits will face higher interest costs. It's important for them to review their financial plans and budget accordingly. Additionally, fixed mortgage rates have already been on the rise. and are likely to continue increasing due to higher bond yields. This means prospective buyers may need to re-evaluate their affordability and consider locking in a rate sooner rather than later. To better understand the bank's rationale behind this important decision, let's examine its observations. Inflation continues to be sufficient concern for the Bank of Canada. In April, the Consumer Price Index inflation in Canada soared saw a modest increase, reaching 4.4%, marking the first uptick in 10 months. This rise was primarily driven by higher prices for various goods and services, despite lower energy costs. The inflation in services remained elevated, reflecting strong demand and tighter labor market. Although the bank anticipates CPI inflation to ease to around 3% during the summer as lower energy prices come into effect, There are concerns regarding the persistence of core inflation measures in the 3.5 to 4% range and the presence of excess demand. These factors raise apprehensions that CPI inflation could remain significantly above the bank's 2% target. When it comes to the Canadian housing and economic performance, the bank noted that the economy exceeded expectations with a GDP growth rate of 3.1% in the first quarter of 2020. Consumption growth remained strong and broad-based, even after accounting for the population gains. Demand for services continued to rebound, and spending on interest-sensitive goods increased. Additionally, the housing market activity has seen recent improvements. The labor market remained tight, with higher immigration and participation rates expanding the workforce. However, new workers were quickly hired, due to continued strong labor demand. Overall, the economy has experienced more persistent excess demand than initially anticipated. Examining the global economic performance and outlook, the bank highlighted that consumer price inflation has been declining globally, primarily due to lower energy prices compared to the previous year. However, underlying inflation remains stubbornly high, while economic growth worldwide has softened in response to higher interest rates, major central banks are signaling the need for further rate hikes to restore price stability. In the United States, the economy is slowing, but consumer spending remains resilient, and the labor market remains tight. Europe is experiencing stalled economic growth with persistent upward pressures on core prices. China's growth is expected to slow after a surge in the first quarter. financial conditions have tightened globally, reminiscent of the period before the bank failures in the United States and Switzerland. In summary, the Bank of Canada justified its decision to raise the policy interest rate based on their belief that the existing monetary policy was not sufficiently restrictive to bring supply and demand into balance and achieve sustainable inflation at the 2% level. The bank emphasized that the quantitative tightening is complementing the restrictive stance of monetary policy and normalizing its balance sheet. Moving forward, the bank will continue to assess core inflation dynamics and the outlook for CPI inflation, focusing on various factors such as success demand, inflation expectations, wage growth, and corporate pricing behavior. Their goal is to ensure consistency with achieving the inflation target. The bank reaffirmed its commitment to restoring price stability for Canadians. With today's announcement now behind us, speculation about the bank's next move will begin in anticipation of the next policy announcement on July 12. We will closely monitor the market and report on the bank's future action on that day. My name is Leigh Villars-Cesneres and this is Let's Talk House. Until next time. You have been listening to the Let's Talk House podcast, your go-to source for all things real estate, mortgage, and beyond in the Greater Toronto Area in Canada. Be sure to press the follow button so you won't miss an episode. Also, follow me on YouTube, Instagram, and Facebook at atleyvillare. And as always, thanks for listening, and we'll see you next time.