As we head into summer, interest rates continue to be top of mind for many. As you know, following a short-lived pause, the Bank of Canada recently raised its policy rate to 4.75%, with many predicting another bump on July 12th.
The Bank’s efforts appear to be having the desired effect. In May, inflation was at 3.4%, down from 4.4% in April. This is welcomed news as we move closer to the Bank’s target of 2%. It’s also worth noting that this puts Canada’s inflation rate below most G7 nations, including the US (4%). Currently, the UK is highest at 8.7%, while only Japan is posting better numbers at 3.2%.
Some suggest that 2% inflation is an unrealistic target in the current environment, but that the Bank will still want to see inflation below 3%. That said, how can the Bank of Canada not increase rates when real estate, the asset class most affected by interest rates, isn’t cooling off? Unit sales and average prices have been on a steady climb since January, while renting a 1-bedroom apartment in Toronto has now eclipsed an average of $2769. Using the old 30% rule, a family or single person must earn $108,000 to live in a 1-bedroom apartment. These aren’t great stats for the Bank of Canada, which means another ¼ point hike seems justified for July.
These rate expectations are impacting mortgage rates. Five-year fixed rates, which were as low 4.69% in 2022, are now over 5.7%. Should June’s inflation figures dip below 3%, we would hope to see the fixed rate come down. So, June inflation numbers will undoubtedly have a meaningful impact moving forward.
In the meantime, we continue to see that homes are selling. Yes, condos are lagging a bit, both new and resale, but well-priced single family, ground level housing in desirable neighbourhoods are selling quickly. It will be interesting to see the impact rising lending rates have on the demand for housing, but I would expect to see more of the same throughout the summer months.
We’re all hoping that 3% will be the new 2% in terms of an inflation guidepost, but this is all to be determined on July 12th.
