By Condo Culture
Another week and another rate decision is in the books. For those of you who missed it, the Bank of Canada decided to raise interest rates on Wednesday by a quarter point to 4.75% in an effort to quell inflation numbers that are proving to be more stubborn than a black bulldog in the heat of the summer. Think we’re joking? Just ask any member of the CC team - we have one as our official CC mascot ;)
Joking aside, back in April we wrote a piece on the heels of the last rate decision and provided a summary of the sentiment and expectations of some of Canada’ leading economists at the time (linked here for reference). The interesting thing looking back on that piece and the respective predictions of each of the economists is that while there were mixed opinions in terms of where rates may actually go, the most common consensus at the time was that we could expect a rate hold, and that these holds may continue to the end of the year when we may start to see rates moving the other way. Only two economists on our list, namely Sal Guatieri of BMO Capital Markets and Charles St-Arnaud of Alberta Central were directly signalling the possibility of future increases following the April decision. Now, before we go any further, we know what some of you are thinking. Asking economists to predict future rate decisions is a little like asking a meteorologist to predict the weather 2 months from now and while we’d like to argue, the divergence of opinions following the last rate decision and the decision on Wednesday would definitely support that thesis. You’re going to get some right and you’re going to get some wrong but ultimately there are so many different variables at play, especially now, it becomes something that is inherently difficult to predict with a high degree of certainty. And in fairness to the economists we covered in our previous blog post, there is so much that can change as new data gets released between rate decisions, such as the unexpected rise in inflation last month that can change their original perspectives leading up to Wednesday’s decision. The other factor at play here is that it can take time, some say up to 18 months, for rate decisions to actually permeate their way into the market and make a true impact. So one question right now from some is did the BOC wait long enough to see the impact of prior decisions and was a rate increase at this juncture, fully warranted? Regardless of your opinion on that matter, the most recent change is sure to make an impact in the market and upcoming purchasing decisions.
On one hand, you have the prospect that rates could even come up slightly higher which may drive some to get into the market now in advance of the next decision. And on the other hand, the general feeling remains that what comes up must come down and following these increases, there remains hope that these changes will help reduce the rate of inflation and lead to a relief in rates by the end of the year or early next. All of this then layered into the fact that immigration targets and the demand for housing in general is still expected to far outpace available supply which should, in theory, continue to put upward pressure on housing prices and make it more expensive to buy into the market. Factors that are continuing to drive urgency to purchase today and/or capitalize on this imbalance, through an investment.
One way in which we’re seeing this translate into real buying activity on the ground is through the purchase of pre-construction condominium units. The simple fact that these units take time, often 2-3 years + to build is motivating a number of investors to purchase units today, where they can avoid exposure to the current rate environment and lock in at today’s prices while betting on the prospect of increased housing prices once the units are complete and formally delivered to market. While it appears likely for this to play out when looking at supply/demand numbers in isolation and this may turn out to be a great strategy to hedge against inflation and drive strong returns, it’s important to look at each opportunity independently and surround yourself with the right experts to ensure you’re making an informed decision.
Have questions about the latest rate decision or pre-construction investing? Call us or drop us a line and we’d be happy to give you our take to ensure you’ve got the latest information and are making the most informed real estate decisions.
Talk soon, -CC