The Bank of Canada raised the overnight rate target to 1%, that is a step up from the recent interest rate increases imposed earlier this year. This might be alarming, as historically, this would mean an interest rate increase for prospective home buyers.
Interest Rates Increase Follow General Growth!
Well, the Bank of Canada is convinced that the international markets have recovered, and are continuing to recover. With solid growth in most countries worldwide, we have seen that Canada is particularly strong in this regard, (despite a supposed real estate market decline).
Canada specifically has had a higher GDP than the Bank of Canada could have predicted for this year. Canada has outpaced any other G7 nation in terms of economic expansion, overall, which defies predictions that called the UK and the USA the definite front runners in 2017 growth.
This rapid economic recovery and subsequent expansion is marked by solid household and consumer spending and of course steady income growth.
What About The Housing Market Decline?
However, the Canadian housing market (in a large part affected by Toronto’s real estate market) appears to be in a decline. Analysts report that in the past few months leading into the end of summer 2017, real estate prices are down nearly 20% since this time last year.
Of course, this is discouraging – and has been, in part, attributed to the new regulations and government interventions in Ontario’s real estate market. Primarily, the introduction of tax penalties for foreign buyers, empty properties and a few other measures that are less notable.
You might remember in the past year that mortgage regulations have been put in place to make it more difficult for prospective homeowners in Ontario to get a mortgage. The interest rate increases are now increasing the rate in which these more difficult to obtain mortgages even more expensive.
Essentially, the Ontario provincial government has introduced said measures to ensure that people do not take out mortgages they cannot afford. The mortgage stress test effectively excluded some players from the real estate bidding market that would otherwise be competing for homes. The rationale behind this was to avoid a mortgage bubble that was a large part of the US housing crisis prior to the great recession of 2008.
It seems, however, that the new regulations in the province of Ontario were intended to increase the availability of affordable housing. Which, according to statistics, they have very well done. However, the average price of homes is determined by the houses that have been sold in the sales slump. This means that many homes that might actually be valued in the ballpark of the pinnacle of prices might just have not been listed or sold in this season.
Why Aren’t Home Buyers Biting If Home Are So Cheap?
The statistics related to this are skewed in such a way that they don’t actually reflect the average value of homes that are not on the market. So by citing an average when the types of listings being sold are much different from the general totality of homes in the city of Toronto are actually misleading.
We might refer to the condominium prices in the city of Toronto and the GTA. With the highest benchmark prices ever in the history of this city. The average price has exceeded $500,000 for the condo sold in the past month. That tells us that property is still increasing in value steadily around those who are praying for the “real estate bubble” to pop.
Those who want to believe that the housing market is cooling off would technically be correct, though. These statistics show that there is market supply in Toronto that is below the average prices mere months ago! The problem is, properties that were a million dollars two months ago haven’t dropped by 20%. Their value is not determined, because they’re not on the market!
Are The Expects Ignoring The Interest Rate Hike Impact?
That said, the interest rate is an important reflection of what Bank of Canada economists believe to be the best course of action for the broader economy in the country. With steady increases in the business and export sector as well as local growth in many markets, they have an important responsibility to impose regulations for the good of the whole market.
The question is now, how will average Canadians enter the housing market? When we have new mortgage regulations, increased interest rates and sky high real estate prices, how can one expect to get onto the property ladder using conventional lenders at an average wage? While Canadian incomes are rising steadily, the new regulations on housing and rate increases are going to do more than deter average Ontario residents from entering the property market.
This is a difficult situation to elaborate on until we see the long term effects for the real estate market, but also the broader Canadian economy. With an interest rate increase, home buyers might be further discouraged that could exacerbate a market decline…
However, we should always remain cautiously optimistic. One of the best parts of Canada’s economy is it’s stability!
You may be wondering as well, what happens if fed raises interest rates what happens to stocks? Or what is the effect of fed rate hike on the dollar? What is the fed rate hike impact on gold?
The future is uncertain, but we can glean that Canada’s fed, the Bank of Canada is a fairly reliable bunch.