Trust you had an amazing Canada Day Long weekend and are enjoying this week’s amazing weather! Let me start this week’s real estate market update by stating how quickly economics can change! In my last update, I spoke of falling inflation numbers (Lowest since 1999) and how the Bank of Canada was likely to pause on any rate increases this year. Since my update was published, media headlines have been buzzing about an impending rate hike and Hawkish comments by BOC Governors Poloz and Wilkins. Market analysts now put the likelihood of an increase at July 12th’s Bank of Canada meeting at 83%. The reason? Canadian gross domestic product increased 0.2% in April’s report. This was in line with forecasts and is the sixth consecutive month of economic growth. The Canadian economy has grown an impressive 3.3% over the last 12 months.
Also impressive is 14 out of 20 economic sectors rising in April. Business growth is supported by the Canadian Business Outlook Survey which recently reported Canadian Business sentiment is at the highest level since 2011. Many businesses are forecasting above historical averages when it comes to sales, investment and hiring plans. Canada is experiencing a broad base of growth despite a sluggish energy sector with oil prices lingering below $50 a barrel.
So what about inflation and is the central bank overshooting by raising interest rates now? After all, inflation is well below the bank’s 2% target and falling. What we suspect is the Bank of Canada is seeing other central bankers moving towards neutral stimulus (US Fed, Bank of England and EU) and are writing off weak inflation and wage growth as lagging indicators of previous slack in our economy given impressive growth and business confidence.
As a result of this turnaround, we’ve seen bond yields shoot up by 0.25% with discounts on longer-term fixed mortgage rates of 3 years and longer being reduced by many of our lenders. Posted fixed rates haven’t changed but investors are pricing in an anticipated 0.25% rate hike on July 12th. Should the Bank of Canada follow through on a rate hike on July 12th, only variable rate clients will be affected. Those with existing fixed mortgage rates will not see a change in their interest rate. From an affordability perspective, a 0.25% rate hike on a $400,000 variable rate mortgage amortized over 25 years is $50.18/month. If the mortgage is uninsured and amortized over 30 years, the difference is $51.86/mo. With interest rates trending higher we’d love to assist you or anyone you know with their mortgage planning!