Let's Talk House Episode 14: Understanding Bank of Canada Interest Hike, Inflation and House Affordability

Let's Talk House Episode 14:  The cost of bringing down inflation is becoming challenging even for Bank of Canada as the country's economy remains strong with strong labour market demand.  This resulted in a 25 basis point increase that caught even the majority of economist off-guard. In anticipation for the rate hike, the prime rate, variable and fixed rate mortgages have gone up as well. Join us as we explore the far-reaching implications of the Bank of Canada's rate hike on homeowners and prospective buyers, shedding light on the evolving dynamics of the real estate market.

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Episode Transcript

SPEAKER_00 (00:00):
In today's episode, we'll focus on the future of

(00:02):
real estate and mortgages inCanada, as Bank of Canada
surprised the majority with aninterest rate hike on Wednesday,
leaving many wondering what liesahead for homeowners and
prospective buyers.
We'll break down the key detailsand explore how this move could
affect homeowners and aspiringbuyers like you.

(00:23):
Only here at Let's Talk House,your go-to source for all things
real estate, mortgage andbeyond, in the Greater Toronto
Area in Canada.

(00:43):
Welcome home.
I'm your host, Leigh VillarCisneros.
The Bank of Canada made asignificant move on Wednesday by
raising its overnight interestrate to 4.75%, the highest since
2001, marking an increase of0.25% from April.
This decision was driven byhigher-than-expected economic

(01:05):
growth in Canada during thefirst quarter and the belief
that the existing monetarypolicy was not restrictive
enough to bring inflation downto the desired target.
The Bank of Canada's moveindicated the concern about
inflation and the need tomaintain price stability.
While higher interest rates maypose challenges for some
homeowners, they are also a signof strong economy.

(01:28):
It's essential to remember thatthe rate hike comes after a
period of robust GDP growth inCanada.
However, this does not mean thatthe housing market dynamics may
shift.
We might see a slight slowdownin demand and price growth as
affordability becomes more of afactor.
Affordability is a key withmortgage costs rising.

(01:51):
Potential buyers might facetougher lending conditions.
It's crucial for individuals towork closely with the mortgage
professionals to assess theiroptions and ensure they are well
prepared before entering themarket.
Looking ahead, how will thisshape the future of real estate
in Canada?
The real estate market isincredibly resilient, and while

(02:12):
the interest rate hikeintroduces new challenges, it
doesn't mean doom and gloom.
We may see a more balancedmarket in a slightly slower pace
of price growth.
The focus will shift towardssustainable and affordable
housing options.
It's also worth noting that themarket will vary across regions,

(02:33):
so local factors should beconsidered when evaluating the
future of real estate.
Flexibility and adaptabilitywill be crucial.
Homeowners and buyers shouldstay informed about the evolving
market conditions and mortgageoptions.
For instance, fixed ratemortgages can offer stability in
a rising rate environment.

(02:54):
It's a great time to explore theadvice and expertise of mortgage
professionals who can guideindividuals through these
challenges and help them makeinformed decisions.
Leading up to this announcement,economists expressed concerns
that the Bank of Canada might becompelled to raise interest
rates given the ongoinginflationary pressures and

(03:16):
recent G The Bank of Canada'sdecision to raise interest rates
caught many off guard.
This rate hike will definitelyimpact homeowners and potential
buyers.
Those with variable ratemortgages and HELOCs or Home
Equity Line of Credits will facehigher interest costs.

(03:39):
It's important for them toreview their financial plans and
budget accordingly.
Additionally, fixed mortgagerates have already been on the
rise.
and are likely to continueincreasing due to higher bond
yields.
This means prospective buyersmay need to re-evaluate their
affordability and considerlocking in a rate sooner rather

(04:00):
than later.
To better understand the bank'srationale behind this important
decision, let's examine itsobservations.
Inflation continues to besufficient concern for the Bank
of Canada.
In April, the Consumer PriceIndex inflation in Canada soared
saw a modest increase, reaching4.4%, marking the first uptick

(04:23):
in 10 months.
This rise was primarily drivenby higher prices for various
goods and services, despitelower energy costs.
The inflation in servicesremained elevated, reflecting
strong demand and tighter labormarket.
Although the bank anticipatesCPI inflation to ease to around
3% during the summer as lowerenergy prices come into effect,

(04:47):
There are concerns regarding thepersistence of core inflation
measures in the 3.5 to 4% rangeand the presence of excess
demand.
These factors raiseapprehensions that CPI inflation
could remain significantly abovethe bank's 2% target.
When it comes to the Canadianhousing and economic

(05:07):
performance, the bank noted thatthe economy exceeded
expectations with a GDP growthrate of 3.1% in the first
quarter of 2020.
Consumption growth remainedstrong and broad-based, even
after accounting for thepopulation gains.
Demand for services continued torebound, and spending on

(05:30):
interest-sensitive goodsincreased.
Additionally, the housing marketactivity has seen recent
improvements.
The labor market remained tight,with higher immigration and
participation rates expandingthe workforce.
However, new workers werequickly hired, due to continued
strong labor demand.
Overall, the economy hasexperienced more persistent

(05:53):
excess demand than initiallyanticipated.
Examining the global economicperformance and outlook, the
bank highlighted that consumerprice inflation has been
declining globally, primarilydue to lower energy prices
compared to the previous year.
However, underlying inflationremains stubbornly high, while

(06:16):
economic growth worldwide hassoftened in response to higher
interest rates, major centralbanks are signaling the need for
further rate hikes to restoreprice stability.
In the United States, theeconomy is slowing, but consumer
spending remains resilient, andthe labor market remains tight.
Europe is experiencing stalledeconomic growth with persistent

(06:39):
upward pressures on core prices.
China's growth is expected toslow after a surge in the first
quarter.
financial conditions havetightened globally, reminiscent
of the period before the bankfailures in the United States
and Switzerland.
In summary, the Bank of Canadajustified its decision to raise

(07:02):
the policy interest rate basedon their belief that the
existing monetary policy was notsufficiently restrictive to
bring supply and demand intobalance and achieve sustainable
inflation at the 2% level.
The bank emphasized that thequantitative tightening is
complementing the restrictivestance of monetary policy and

(07:23):
normalizing its balance sheet.
Moving forward, the bank willcontinue to assess core
inflation dynamics and theoutlook for CPI inflation,
focusing on various factors suchas success demand, inflation
expectations, wage growth, andcorporate pricing behavior.
Their goal is to ensureconsistency with achieving the

(07:46):
inflation target.
The bank reaffirmed itscommitment to restoring price
stability for Canadians.
With today's announcement nowbehind us, speculation about the
bank's next move will begin inanticipation of the next policy
announcement on July 12.
We will closely monitor themarket and report on the bank's

(08:08):
future action on that day.
My name is LeighVillars-Cesneres and this is
Let's Talk House.
Until next time.
You have been listening to theLet's Talk House podcast, your
go-to source for all things realestate, mortgage, and beyond in

(08:31):
the Greater Toronto Area inCanada.
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