Last week’s interest rate hike as put forward by the Bank of Canada was the ninth hike and came following what was promised as a ‘pause’, and meaning that no further rate hikes would be put in place for the near foreseeable future. What they’ve provided as a rationale for making that move is a stronger economy than expected as represented by Canada’s GDP. And despite the fact there’s not much healthiness to it, we as a country have a shockingly high amount of our GDP being produced by the purchase and sale of real estate.
That’s the product of loose monetary policy and an ‘anything will do’ approach to economic underpinnings in a country that has made a sharp and drastic departure from the socioeconomic track it had been on for well over a century to date. That’s an entirely different and much larger discussion for a different time though, and instead it’s going to be our focus to look at how a reinvigorated housing market seen over recent months here in Canada has done much to fuel the decision to raise rates.
That uptick in activity certainly is welcome for many different people with a host of different interests in seeing the real estate market rebounding as it has. Realtors will be among them, but agents who still struggle to be finding and retaining new clients will like how our online real estate lead generation system here at Real Estate Leads is the smart choice for giving you the advantage you need there.
Forced by Household Sector Demand
Digging deeper, the resale market’s role in the most recent inflation measure is even more pronounced than some might have thought it to be, and Statistics Canada’s Consumer Price Index (CPI) edging up 4.4% in April is the first of a few indicators of that. Seeing an economy continuing to features excess demand exceeding supply to an ever-greater extent with not the expected rebalancing there is front and center with why the interest rate hike was deemed necessary
Growth in the second quarter with regards to home sales was viewed as likely to be stronger than forecast in the April MPR, and even though housing resale prices had grown over the course of three months it wasn’t lining up with the expectation for inflation to decrease to near 3% over the summer. It’s clear by this point that is not going to happen, and all of these rate hikes have been undertaken with the primary aim for them being to reel in inflation.
And that checks out here too, as the trends in the core inflation data have created doubts about the strength and durability of ongoing disinflation. Those are coming at the same time as concerns that inflation could become stuck at a level materially above the 2% target. The last part of that is darn near a direct quote from the BoC, and there are others that relate to additional variables contributing to the need to rise rates, but we’ll skip those for now.
Nothing is more integral to the perspective than the way consumer demand has proved to be more robust than expected. As to why the economy has shown itself to be so resilient, we can look to a number of specific points; a delay in the full effects of past monetary policy tightening, pent-up demand for services and improvements in supply chains for goods, excess , and labour markets that have stayed much tighter than economists had expected. Emphatic population growth and seasonal adjustment factors have their own roles to play too.
Another outlier from what was foreseen was an accompanying jump in median household spending, and this always has a connection to increased consumer confidence across the board with different markets. The housing market is never an exception to that, and by the middle of this current month (June ’23) there’s been enough evidence to convince the BoC that their policy needed to be more restrictive to rebalance supply and demand in the economy and reorient themselves to reach the 2% inflation target.
The rate hikes do mean that people who can’t afford to pay cash for a home WILL have greater difficulty affording their mortgage, and anyone that applies to won’t like to hear that they may be upcoming interest rate hikes again before the year is done. Another decision will be made on the 12th of next month following a further review.
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This was the first raise since January and experts are cautioning that it won’t be the last.
The next interest rate decision is slated for July 12, 2023. A monetary policy report is also scheduled for release at that time.