Will Prime rate go up again?
Whether you own a home with a variable or fixed rate mortgage, or you’re looking to get into the market, it’s likely you have been watching the news about the prime rate with interest – and asking, “will prime go up again?” The short answer is “Yes.” On July 13, 2022, the Bank of Canada raised its benchmark interest rate by a full percentage point to 2.5%. Do we anticipate a further increase afterwards? Again, yes, we do expect additional increases in the fall; however, the outcome of the July 13 increase will drive whether another increase will happen and the amount of the increase.
What is causing us these rate hikes?
As Economist David Rosenberg states, “Inflation, inflation, inflation.” Canadians have a considerable amount of unsecured debt as a result of unprecedented spending on consumer goods during the pandemic.
Borrowing costs for banks
In addition, the cost of borrowing for the banks is increasing. Five inflation markets that are causing rate increases are:
- Consumer goods – this is distinct from necessities (see below) and is driven by consumer spending;
- Consumer necessities – things like food and gas will likely increase further over the next 6 to 18 months;
- Cost of Rent – rent is predicted to rise upwards of 30% in coming years, and has already been rising steadily. This is because there is insufficient availability to meet demand. The cost to rent may become higher than the monthly payment of a mortgage; and
- Wage inflation – employers are having difficulty finding workers, as the job market is such that switching jobs is leading to higher earnings so workers are not staying at their jobs for as long as before the pandemic
Development slowing down
A number of factors are reducing profitability of development and causing developers to hold off on existing projects, and slow down or even cancel their plans to build new projects. These factors include: the costs of construction having increased substantially over the past few years, builds taking twice as long to complete (primarily due to supply chain issues and labour shortages), and rising interest rates. If this trend continues in the next 2 to 3 years, we could see another shortfall in inventory, which in turn, could drive up home prices once again. Anticipate that it will take at least 12 to 18 months for the ongoing interest rate hikes and these other factors to cause consumer demand for products to decrease, and therefore for the government to stop raising rates. At that point, rates should stabilize.
Strong immigration growth
Not only does recent research show that recent immigrants are more likely to state they intend to purchase a property over the next year, but they estimate the purchase price to be higher than what non-immigrant respondents estimate – and with over 400,000 more immigrants per year expected to enter Canada, this motivated group will grow. The three real estate markets with the highest rates of immigration are Toronto, Montreal and Vancouver. Therefore, especially in those areas, prices may stabilize despite rate increases, and result in a more balanced market for the next couple of years. The longer-term projections indicate we could see a larger demand on purchasing homes again, which in turn could cause another housing shortage (and therefore higher prices)
If you already own a property, what does this mean for your mortgage?
Despite all of this, the current variable rates are still lower than the pre-pandemic rates. If you are questioning whether you should have locked into a fixed-rate product, don’t. It is very important to look at the savings of having stayed with a variable rate over the past couple of years. If you had a variable rate product from 2020 to present, the savings over a fixed rate could be upwards of $25,000 to $45,000. Over and above the principal savings, you must also consider the value of your home increasing during this Ome by 10%-45% (depending on area). What is likely your most important asset has been increasing in value while your mortgage balance is decreasing considerably – this is a WIN. There have been media reports stating that payments may rise up to 45%, but these often fail to mention that payments have also dropped during the pandemic years (2020-2022) due to historically low-interest rates – the market is just catching back up.
Avoid allowing media coverage to cause you to question your overall long-term goals. Media reports can sensationalize and overstate the true effect to the average consumer. Stay focused on building your financial net worth with your largest financial asset. When in doubt, recall these statistics:
- The average home price in the Greater Vancouver Area increased an average of 9.4% from March 2020 to March 2021, with additional increases between 2021 and 2022 (increasing your overall net worth).
- This represents a net worth increase to the average consumer in the Greater Vancouver area of over $100,000 in just one year.
- A new forecast by the BC Real Estate Association anticipates the province’s average home price will see year-over-year increases of 11.5% to $1.034 million in 2022, and a further 0.8% to $1.043 million in 2023.
If you do not yet own a property, what should you know about buying in this market?
Buying when the market is “soft” or in a “downturn” is a great opportunity to get something that will appreciate in the next 5 years. It also provides you with the opportunity to write a fair offer, and to include subjects to allow you to complete your due diligence prior to committing to a purchase. As described above, we are heading into a balanced market soon, so if you have been thinking about buying, this could be a great opportunity.
Buyers should understand that they are unlikely to see a market with both very low-interest rates and in a sustained “buyers market” condition – so they should accept paying a little bit more per month for the initial term of their mortgage (and have more inventory to select from, as well as not be at risk of overpaying in a bidding war), OR have lower monthly payments for their initial term (but compete with many other prospective buyers and potentially pay speculative pricing).