Bank Of Canada Raises Key Interest Rate To 5%, Expects Slower Return To Inflation Target & Article on impact on Cottage properties
THE DECISION FOLLOWS A RATE HIKE IN JUNE
Courtesy Barrie 360 and Canadian Press Published: Jul 12th, 2023
By Nojoud Al Mallees in Ottawa
The Bank of Canada raised interest rates again on Wednesday, hitting the economy with even higher borrowing costs as new projections suggest it will take longer for inflation to fall back to two per cent.
The central bank hiked its key interest rate by a quarter of a percentage point, bringing it to five per cent.
Forecasters were widely anticipating the central bank to raise rates as the economy continues to run hotter than expected, despite interest rates being at the highest levels in decades.
The Bank of Canada says the rate hike was prompted by elevated demand in the economy driven by strong consumer spending, as well as signs that prices continue to rise rapidly.
“These decisions are difficult, and we did discuss the possibility of holding rates unchanged and gathering more information to confirm the need to raise the policy rate,” Bank of Canada governor Tiff Macklem said.
“On balance, our assessment was that the cost of delaying action was larger than the benefit of waiting.”
Macklem said the central bank is trying to balance the risks of raising rates too much versus not enough.
“If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don’t want to do more than we have to,” he said.
“These decisions will be guided by our assessment of incoming data and the outlook for inflation. We need to see demand growth slow, wage pressures moderate and corporate pricing behaviour normalize.”
Despite the central bank’s forceful tone and declared willingness to raise rates further, many commercial bank economists still expect this to be the last rate hike of the year.
“Our own outlook is a more pessimistic one than the central bank’s. We see more signs that the economic backdrop is softening,” wrote Nathan Janzen, assistant chief economist at the Royal Bank of Canada.
“That should be enough to push the BoC back on the sidelines with no additional interest rate increases this year. But they are clearly willing to hike again at the next decision in September if inflation in particular doesn’t show further signs of easing,” Janzen said in a note.
The decision Wednesday follows a rate hike in June, which brought the central bank’s previous pause on interest rate increases to an end.
The Canadian economy was widely expected to stall this year, but instead, economic data has been stronger than most forecasters, including the central bank, had expected.
And although inflation has fallen considerably since last summer, prices for many goods and services continue to rise rapidly.
Canada’s inflation rate reached 3.4 per cent in May, down from 8.1 per cent last summer. Meanwhile, grocery prices rose nine per cent in May compared to a year ago.
The central bank’s updated economic projections released in its monetary policy report suggest it will take Canada longer to get back to the two per cent target.
The Bank of Canada now expects inflation to stall around three per cent for the next year, before steadily declining to two per cent by mid-2025.
“This is a slower return to target than was forecast in the January and April projections. Governing council remains concerned that progress toward the two per cent target could stall, jeopardizing the return to price stability,” the Bank of Canada said.
The central bank also expects stronger economic growth this year both globally and domestically. It revised its projection for real gross domestic product growth in Canada to 1.8 per cent for 2023, up from 1.1 per cent.
Interest Rate Hikes Weighing On Cottage Market, Where Prices Are Expected to slide
‘THE PROPERTIES THAT DURING COVID WERE SELLING FOR A COUPLE HUNDREDS OF THOUSANDS OVER ASKING PRICE ARE NOW KIND OF SITTING’
Courtesy of Barrie 360 and Canadian PressPublished: Jul 12th, 2023
By Tara Deschamps in Toronto
When the warm weather hits, Arthur Parks usually sees up to 10 referrals from Toronto real estate agents with clients feeling the allure of lakeside living as the summer heats up.
“This year, I haven’t received any,” said the real estate agent serving Peterborough and the Kawarthas, two of Ontario’s most popular recreational markets.
“That’s a dramatic difference. It tells me that people are not actually out there looking to buy cottages.”
That dampened demand has come amid a succession of interest rate hikes — the latest was made Wednesday, when the key rate was hiked by a quarter of a percentage point to five per cent — that have shaved down buying power and made some rethink purchases, especially those of the recreational variety.
While many still dream of days spent at the dock, they’re holding back on buying their slice of cottage country until they have better sense of whether the hikes will continue or until they see prices slide.
Royal LePage expects the aggregate price of a single-family home in Canada’s recreational regions to see a “modest” decrease of 4.5 per cent this year to $592,005.
Reduced demand and a lack of supply would keep the national aggregate price more than 32 per cent above 2020 levels and come after two years of double-digit price gains across the recreational real estate market, the real estate firm said in a spring report.
“The properties that during COVID were selling for a couple hundreds of thousands over asking price are now kind of sitting,” said Christina Clayton, a real estate agent in the Muskoka region.
While buyers of luxury properties in Muskoka have been more immune to interest rate shifts, Clayton’s business partner Heather Scott said people eyeing recreational homes priced between $800,000 and $1.6 million are “the most affected group of buyers by the rate changes.”
These people tend to be looking for older, family cottages and are willing to sit on the sidelines until the market produces their ideal buying conditions, or at least clarity around where the market is headed.
“They seem to be waiting for sellers to drop the price.” said Scott.
“Knowing rates have increased and have changed the buying power, they’re holding out for sellers to come around.”
But sellers are willing to wait too, especially if it means they can make more money. They know much of the lakefront property has been purchased and developed and with workplaces more open to remote or hybrid work, they expect demand for cottages won’t wane much.
Such dynamics have produced a slow start to the selling season and created a “quite dramatic” shift in the market, said Parks.
“When I looked at waterfront properties that sold this year compared to last year in Peterborough County, we have about 80 per cent of the sales we did last year.”
That amounts to about 135 sales this year compared with 165 in 2022.
In the category of homes valued at $2.5 million and above, Parks said the Peterborough market has seen about 50 per cent of the sales this year that it had in 2022.
In the $1.5 to $2 million range, sales were about 33 per cent of what they were last year, and in the under $1.5 million category, they’ve amounted to 87 per cent compared with 2022.
“There’s an increase in the number of sales under $1.5 million, so this tells me people are steering downward from where they were a year ago and not as many people have been buying,” Parks said.
Choices around cottage ownership often come down to affordability, said Nicole Ewing, a director of tax and estate planning at TD Bank, in an interview a few minutes after Wednesday’s rate hike was announced.
“I would say that definitely the math has changed,” she said.
“When rent has increased, of course, the cost of borrowing may go up and as mortgages get more expensive, higher monthly payments would typically result in reduced purchasing power, so these properties may be less affordable to many of the people who may have been hoping to get into that market.”
Many have had to focus on the finances of their primary residence rather than seek another home for weekend or summer getaways and they’re thinking more about the continued maintenance costs and even the higher gas costs to get to the cottage.
Whenever prices are lower or the fair market value of a cottage is seen to be lower, Ewing said people look to pass properties on to the next generation to reduce their capital gain.
Others may consider selling, Ewing said.
“But there’s always that question of ‘am I going to get the price that I’m hoping to get?’”
Patricia is the Business Mentor and owner of Grow Vantage and a Past President of the Barrie Chamber of Commerce. She applies over 30 years of business experience (from start-up to corporate) to mentor entrepreneurs. Since 2011, she has held over 6,500 coaching and training sessions in-person and online. Through Ask For Directions Training, her entrepreneurial training program (and parent company Grow Vantage), and as a business coach, she works with start-ups who are new (or who have lost traction) to design, launch and grow their businesses. Along with 20 other expert instructors she teaches strategies in marketing, sales, communications, and finance, as well as practical techniques to increase productivity, and manage their businesses. In other words, everything entrepreneurs need to learn to grow and run their businesses successfully, and avoid the costly mistakes they can't even see coming - that lead to delays in growth and getting stuck.
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