"Bank of Canada raises key interest rate by 1 percentage point, the biggest move since 1998" - Globe and Mail (full article link in footnotes)
When you read that heading, it might not surprise you. All of the speculation this past month has been around this change in the rate.
Maybe not this big, but the speculation was there.
But the part of this announcement that is most impactful for the real estate market hasn't even hit the headlines.
But before we get into that massive adjustment, I just wanted to take a moment to discuss this change and why it was this big.
Overnight Rate Increases to 2.5%
This change was speculated to be around 75 basis points. So when it was announced to be 100 basis points, most forecasters weren't expecting this big of a change.
However, if we look at some of the early inflation data out of the US, even with their increase of 75 basis points back in June, the inflation rate grew to 9.1% in June.
When you can see these changes not having the effect they are looking for in the US, it's easy to see that the BOC would want to implement a rate that would not only shock most forecasters but also make those looking to buy real estate take a good look at their finances before doing so.
This rate change is only going to affect the housing market inflation costs that we have been seeing as of late. It cannot change the oil prices or the cost of goods and groceries that we all require each day.
What it does do is slow down nearly a third of the Canadian economy, which is heavily invested in the housing market so that we can get inflation as low as possible but still not trigger a full-out recession.
Why Is This Rate Different Than The Others?
This change in the overnight rate is the first time since the rates have been increased which makes the prime rate and the stress test too close to one another to allow for the 5.25% benchmark rate to be used when qualifying buyers.
What this means is that when a buyer is considering a purchase of a new home, the contract rate that their broker finds for them is used to determine the stress test benchmark to use. These include the higher of the following:
5.25% benchmark rate
2% higher than the contract rate
With the latest increase in the overnight rate, the prime rate for lenders has also increased from 3.7% to 4.7%.
Because the prime rate is this high, most buyers will be forced to quality at the 2% higher than the contracted rate for their mortgage, which can range well over 5.25%.
This change effectively reduces the purchasing power of the buyer right out of the gate when they are looking for their next home.
As this higher prime rate remains (or further increases) more and more buyers will be able to qualify for less and spend less.
Where this becomes an issue for sellers is in the price they can ask for their home when they decide to sell.
Our lower inventory levels in Calgary will buffer this drop to some degree, but as more and more buyers are subject to higher stress tests, the pricing for homes across all segments can anticipate a drop.
This change also effectively drops the pool of qualified buyers available to purchase homes, making it harder to receive multiple offers for a single property.
Not to mention, the lenders will be even more strict on getting appraisals completed to ensure the unbiased value of the home is accurate to current market conditions.
What Can You Do As A Seller?
Your property is still very much a hot commodity. Depending on the segment you are in, the pricing has stayed very much in line so far with only minimal drops (see my latest market update here).
If you are considering a sale, use the seasonality of the market right now to get your home up for sale while the other sellers are sleeping on the market enjoying the summer weather.
This would be ideal as well for you to start shopping for your next home in the fall when inventory levels tend to rise slightly.
Buyers - Here Is Your Game Plan!
Revisit your application for the mortgage with your broker. Speak to them about the affordability of the approval and make sure you have a plan for the current rates as well as any new changes to interest rates if you are in a variable mortgage (check out my cheat codes here).
If the numbers aren't lining up for you in the segment you want to be in, revisit adding in more down payment from alternative sources like gifted money from immediate family. This will help to reduce your mortgage amount and allow you to keep the payments manageable.
Finally, the most important thing you can do is breathe and take a step back from the search. Know that this in time will pass, just like how the extremely hot real estate market did just 4-5 months ago.
Take stock of what you can afford, what you are looking for, what your time frame is, and know. that our market here in Calgary has not swung the same way as Toronto and Vancouver. There is a property out there for you and you and your agent need to have a game plan for staying up to date on what is coming up for sale and having the ducks in a row to act quickly when it does.
I hope this little update on the BOC change was helpful. If you have any questions, at any time, please feel free to reach out by email at firstname.lastname@example.org or connect with me below through social media.
I look forward to connecting with you! Take care!