Bank of Canada Interest Rate Hikes and What This Means for Real Estate

Last week, the Bank of Canada hiked its key interest rate by a full percentage point, bringing it to 2.5%. This is the largest incline in 24 years and will increase the cost of borrowing money in hopes that it will help bring down high inflation rates. Inflation is currently sitting at 7.7%, a high not seen in almost 40 years.

The banks are now following suit, raising their prime lending rates from 3.7 to 4.7%. This change will drastically impact the rates that Canadians get on their mortgages and lines of credit. 

When covid hit, the bank lowered its rate to record lows to help stimulate the economy by making it easier for people borrow and spend money. Now with inflation at its highest level in 40 years, the bank keeps introducing higher interest rates to help catch up.

More increases are being predicted simply because inflation is so high right now. The Bank said contributing factors include the war in Ukraine, supply chain disruptions, and “domestic price pressures from excess demand are becoming more prominent”. There is also record low unemployment, and labour shortages here that are also contributing. 

This change will show on the housing market, with variable rates mortgages being tied to the banks rates. Fixed rate loans may increase to 7%, and variable loans to 6%, meaning many people will not be able to pass the stress test required for a loan, or will become overwhelmed with their mortgages.

As I originally predicted in a blog dated back in March, the correction we are seeing in the residential market would eventually spill over into the ICI markets (albeit I predicted it would take 6 months).  We’re already seeing a major shift as Bond yields have now increased, which directly effects Real Estate Cap Rates.  When investors have the option to buy bonds, at say 6%, they are faced with a dilemma when investing into income producing properties which may yield less of an ROI now than the Bond market.  

Something has to give and that usually means Cap Rates need to be adjusted.  I for one can say that I’ve noticed a slow down in calls for my income listings and after speaking to several of my normally bullish buyers I can confirm that the majority of them are now in a hold position to see how much further the Feds will raise interest rates.  

The spillover I had hoped would take 6 months to effect the ICI markets in fact only took 5 months.  On a good note the Bank of Canada estimates that inflation will return to 3% inflation at the end of 2023 and its 2% target until at the end of 2024, which means interest rates should hopefully stabilize as well, thus avoiding any major catastrophic recession.

While there is uncertainty in the future this also creates opportunity for those willing to take risk!  And while calls have slowed down, I am still receiving offers, albeit fewer of them, so by no means should anyone panic.  There are still investors looking for opportunities!