South Forest Hill Residences floor plans.House prices are still falling! After the Bank of Canada raised its benchmark interest rate for the seventh time in a row on Wednesday, Canada’s six largest banks have followed suit by raising the best lending rate.Please Visit: South Forest Hill Residences floor plans to Get Your VVIP Registration Today!
After the central bank raised interest rates by 25 basis points, the central bank now has an overnight interest rate target of 4.5%.
The Bank of Canada’s policy rate sets borrowing rates for other commercial lenders, which affect the terms of home mortgages and consumer loans.
Following Wednesday’s decision, six major Canadian banks-TD Bank, Scotiabank, BMO, RBC, CIBC and National Bank-have raised their best lending rates by 25 basis points to 6.7 per cent.
The central bank said on Wednesday that it believed inflation would “fall sharply” and was prepared to stop raising interest rates temporarily after raising policy rates by a total of 425 basis points.
The central bank shares its expectations for housing in its latest monetary policy report (MPR). The central bank expects the decline in home sales to hit bottom in the near future. However, this is not enough to stop real estate from dragging down the economy or preventing house prices from falling further. House prices will still fall, especially in areas where they have soared over the past two years.
The central bank believes that higher interest rates will help lower house prices and expects interest rates to continue to play a role. By raising interest rates, the cost of services increases and leverage decreases. This reduces the number of qualified buyers, resulting in reduced liquidity. In order to buy a house, buyers either need to make more money, or house prices need to fall. The reality is that the former is more difficult than the latter.
Since the Bank of Canada does not have any plans to cut interest rates, it is easy to see why the central bank wants this to continue. The housing downturn that began in 2022 is expected to continue in the short term, MPR said.
At the same time, the central bank predicts that home sales will stabilize after a sharp decline. Compared with the previous year, resale through MLS decreased by 25.2% in 2022. The current trading volume is well below average, and it is reasonable to expect some normalization in the future. House prices have fallen, at least a little, which may attract buyers.
Growth in new construction and resale sales is likely to pick up in the second half of 2023, supported by low inventories and strong migrant demand, the central bank wrote.
The central bank expects the slowdown in the Canadian real estate market to be a drag on the economy in the short term. The central bank estimates that real estate will reduce GDP growth by 1 percentage point by 2022, down from the previous forecast of 0.9 percentage points. This year, the central bank expects economic growth to fall again, by 0.7 percentage points.
The Bank of Canada expects growth to resume next year, but not as it did in 2021. The central bank predicts that housing will provide 0.3 percent economic growth by 2024. By contrast, it provided 1.3 percentage points in 2021-more than 1/4 of the economy.
A senior economist at Vanguard said that while financial markets were already expecting several rounds of interest rate cuts and pricing this autumn, the Bank of Canada would not cut its key lending rate this year.
“their credibility [of the Bank of Canada] is under threat,” Roger Aliaga-Diaz, senior economist at Vanguard and head of global portfolio construction, said in an interview.
“[the Bank of Canada] is worried that if they succumb to the demands or expectations of the market, resulting in a rebound in inflation, they will have no credibility to control inflation.”
When inflation began to exceed the central bank’s 2% target in the spring of 2021, officials assured Canadians that it would be short-lived. Now, two years later, inflation is beginning to show signs of abating after the central bank’s most aggressive tightening cycle in history.
‘it ‘s a big blow to its credibility, ‘Aliaga-Diaz said. He added that the central bank would rather go against market expectations of interest rate cuts until they were fully sure that inflation had been contained so that it could maintain its last bit of credibility.
“to be clear, this is a conditional pause on the condition that economic development is in line with our forecasts,” Bank of Canada Governor Tiff Macklem said at a news conference on Wednesday.
Macklem repeatedly reiterated at a news conference that “it is too early to talk about interest rate cuts.” But in any case, the data show that financial markets are already pricing five rate cuts between October 2023 and April 2024.
However, Aliaga-Diaz said the Bank of Canada’s risk was “asymmetric”.
On the one hand, higher interest rates could lead to a recession, which most economists think will be mild. On the other hand, lowering its benchmark interest rate could lead to a rapid rebound in inflation, further away from the central bank’s 2 per cent target, he added.