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The Impact of Inflation: How Canada's 4.4% Could Change the Recovering Real Estate Market
By: The Canadian Home
The cost to replace owner-occupied property saw a slight increase of 0.2% in April, indicating a housing market slowdown after a 1.7% gain in March. Supply chain challenges in new home construction have further driven up housing prices, surprising experts and highlighting their substantial impact on the Canadian economy.
Will the BOC increase interest rates on June 7?
According to the Bank of Canada, many borrowers in Canada will face higher mortgage payments when they renew their loans in the coming years, with an estimated increase of 20% to 40%. This is due to the rising benchmark interest rate set by the BoC. Variable-rate loan borrowers are particularly affected, as a larger portion of their payments goes towards loan interest rather than principal, leading to extended repayment periods.
Approximately one-third of mortgages in Canada have already experienced payment increases since the BoC started raising interest rates. While the labour market strength and the low unemployment rate may enable more households to afford higher rents, some families will face greater challenges. There is a high risk of people defaulting on their mortgage payments as a result.
The higher interest rates have also contributed to an increase in rental prices, further driving up housing costs. In April 2023, the two main inflation measures, CPI-median and CPI-trim, averaged 4.2%, slightly lower than the previous month. Experts believe that the BoC still has limited room for further rate increases and that their inflation targets of 3% in 2023 and 2% in 2024 remain achievable.
Home prices have been on the rise, with benchmark prices increasing by around $15,000 and average home prices up by $30,000 in April. Stable interest rates and rising prices have attracted more buyers. Yet, the unexpected inflation surge challenges the BoC's interest rate strategy.
Rising interest rates and affordability challenges may have consequences for the Canadian economy, including defaults and economic instability. The BOC is wary of international financial system vulnerabilities that could impact Canadian companies, prompting actions to mitigate default risks in small business and retail banking sectors.
Given the circumstances, the BOC may choose to keep interest rates unchanged on June 7 and in the near future. However, the situation remains uncertain, and it is crucial for market participants to stay alert and ready for potential shifts in the economic landscape.