It has finally happened. The recent rate increase by the Bank of Canada has completed a full 100 points or 1% raise in one year. The commercial banks will be quick to adjust their borrowing rates but typically slow to adjust the interest rate on your savings.

Economists will tell you such a move by the Bank of Canada is meant to cool the economy, fight inflation, strengthen the loonie and make imports cheaper for manufacturing etc. A higher rate also provides the Bank of Canada with some ammunition to deal with a slow economy or God forbid a depression in the future.

What does this mean for real estate investors?
Let’s be honest, we have a short memory, we have gotten used to record low interest rates over the past decade. Interest rate being near zero and mortgage rates between 2% to 3% is an abnormality. With the cost of money next to zero, businesses and people invested, spent, consumed and borrowed, resulting in a stronger economy, rising inflation and a crazy boom in real estate.
But now the wheels are turning in the opposite direction. The Bank of Canada actually said they want to see Canadians buying smaller homes. Warning, it’s a funny thing about anticipated economic events, they tend to surprise you two fold. They arrive sooner than expected and when they happen, they unfold quicker than planned.

It’s safe to say that now that the cost of borrowing is higher and with the borrowing stress test in place, financing real estate purchases or refinancing have become difficult and more expensive. Those cheap equity lines of credit we only pay the interest on are starting to burn in our pockets. Never mind wanting to get more, we now need to pay them down or get rid of them altogether. But what if you can’t? And your debt service is weighing on your household? Then you sell, the car, the cottage, a rental property, your home. Meet greater supply.
On the other hand, with the cost of borrowing, higher NOI (Net Operating Income) calculations for an investor are tougher to make sense of. The negative cash flow which has become customary around Toronto is more negative. Meet less demand.

Economics 101: when greater supply meets less demand prices go down. The Bank of Canada has achieved its goal. So expect real estate prices to go down somewhat, not massively because it’s only been a 1% rate increase. But if you’re not heavily leveraged and you have a decent down payment prepared this is your time to shine. With a 25% to 35% down payment you will  get financed more easily and are less sensitive to interest rate levels. With supply being higher and more distressed properties coming to the market get ready to pull the trigger, it’s time to buy.

Broker of Record, Schichter Realty Inc.
zvi@schichterrealty.ca
647-294-2285