If you want to better understand this week's interest rate hike and what to expect in the housing market for 2023 this post is for you!
Let's dive into it.
The Bank of Canada raised its prime rate again this past week at their first meeting of 2023. The good news is that it was a mini hike (0.25%) compared to the 50 and 100-point hikes we've become accustomed to.
This was on the back of a December inflation report, which showed that Canada's inflation rate dropped from 6.8% to 6.3%. In their statement Wednesday, the bank of Canada says they expect this number to fall to 3% by the middle of this year. They then expect to hit their 2% target in 2024.
The word "pause" was even used several times by Governor Macklem. Many media outlets like this one have jumped on this word to grab attention with their headlines. The word "pause" is something we've been waiting to hear for a while now.
While it's great to hear, it's important to take into account what else was said. Elaborating further Governor Macklem said it would be a conditional pause. If inflation does not come down in line with expectations more tightening will occur.
So we are not out of the woods yet.
Now, this needs to all be taken with a grain of salt. These are the same people who said rates would stay low until 2024.
That said, I'm not here to rain on any parades. No doubt, this meeting was the first one that suggested some relief may be on the horizon. I was happy to hear it and despite the conditional nature of the message, it is good news.
What does this mean for you in 2023?
My hope is that 2023 will see that pause as advertised. I don't think rates will fall in 2023. I think that's a project for 2024.
I do not think the housing market will crash. Consider these facts:
50% of Canadian homeowners do not have a mortgage.
Of those with mortgages, 70% are on fixed payments which will keep their payment static.
What about the Homeowners who 3-5 years ago had rock bottom fixed rates of 2% but are now up for renewal at 6%?
Well, they had to qualify at a stress test rate of 5% at the time. Today they'll be looking at an interest rate of around 6% but at a lower mortgage principal. I'm very confident they'll be able to continue making their payments. They'll have other options to lower their payment (ie extending their amortization) if need be.
As I alluded to in this post, mortgage delinquency rates are at historical lows. I do not expect them to rise significantly, especially if the Bank of Canada's monetary forecast comes to light.
All that said, I don't expect 2023 to be a high-flying year for real estate. I think inventory will remain low which will still support the successful sales of homes. I don't think prices will take off, until rates fall dramatically.
On the buy side, until rates come down I expect demand to stay stifled, which is kind of the point of all this monetary tightening.
Bottom line for sellers: If maximum price is important to you I'd be planning on waiting out this year for 2024. At least for the first half of this year, I don't expect prices to move much, in which case you'll want to keep an eye on the latter half of 2023. If you are selling AND buying, I still believe this is a great market for that scenario. You'll get less demand for your home but face much less demand to buy your next. Conventional real estate wisdom is that you make money on the buy. This market presents great opportunities in that respect.
Bottom line for buyers: 2023 has the potential to see some of the best buying opportunities we've seen in quite some time. Demand remains stifled by what's happening with interest rates. But relief appears to be on the horizon. Sentiment will swing fast once the broader market realizes that rates are coming down. At that point the backlog of demand will spring into action. I'm not sure that happens this year but most economists, even conservative ones, expect rates to move next year. So this year is a buying year for me.
That's it for this week. Onto week 17 next week.
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Have a great day!
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