As Predicted, Rates Are Up

Interest rates are up

On Wednesday, January 17th the Bank of Canada confirmed broad market expectations and raised its benchmark rate to 1.25%. This is the third-rate hike since the close of the Summer of 2017. As previously outlined, rates on mortgages and numerous other financial products will now increase and the pressure on first-time buyers especially will now rise. Before the 2007-8 crash, the Bank’s rate was just under 4.5%, a number consistent with historical averages. Indeed 2009-2017 was the longest sustained period of near 0% in Canadian history, a cheap money surge that fueled a massive construction and real estate boom.

BOC sends moderating signals again

As per usual, the Bank of Canada outlined its position that it will consider further future hikes carefully and that it does not seek to overwhelm the economy with hikes that are too numerous and too fast. The Bank was especially vocal about NAFTA, the trade agreement between Canada, the U.S., and Mexico – and the possibility of it being amended or scrapped by the Trump Administration. The Bank feels that changes to NAFTA could have adverse impacts on the Canadian economy, especially if the U.S. makes abrasive changes to the agreement that prioritize U.S interests and economic concerns over Canada’s.

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Real estate will be diversely impacted, but rates still at historic lows

The hike will add pressure on first time home buyers by making mortgages more expensive for them. It will also lessen market dynamism in some respects as developers and builders will have to adapt to the increase in money costs for new projects. The impact could be positive in the sense that the risk that banks are willing to now accept for new buyers and mortgages will lessen, thus improving the overall quality of the mortgage pool. Condo prices are likely to be positively affected as increasingly strained first-time buyers turn to them for affordability. Either way, rates are still at historic lows.