The 4/11
In July, the Bank of Canada raised interest rates to 2.5%, the largest one-time amount in more than 20 years. This was in an attempt to help combat inflation. Raising interest rates occurs when the central bank wants to cool down an economy that is overheating. The reality is that higher interest rates shrink home buying budgets. In tight markets, this pushes prices down.
How Should I Move Forward?
Here’s the truth – it’ll cost you more to wait. Some clients have said they wish to wait until prices come down before buying. Maybe this is you! With the speed of the rate increases, this will actually work against you. If the prices do come down, the higher interest paid will actually cost you more, with the addition of a higher monthly mortgage payment.
Here’s a good visual from a colleague’s Instagram for those who want to see things broken down. The bank of Canada will likely increase rates two more times before the end of the year. This recent 1% rate increase from July 13 works out to $54 per month/100k borrowed.
Investments in Real Estate vs. Investments in the Stock Market
At the moment, we are seeing much sharper declines in the stock market due to recession and interest hikes, both which shrink companies’ balance sheets and investment portfolios. This year, the S+P 500 is down significantly more than Real Estate prices in Calgary, so if you decide to diversify your investment portfolio in real estate investments, you could be much further ahead than if you keep your money in declining stocks. The graphic below shows the benchmark price increases for residential properties across Canada, but specifically Calgary at 23% growth. This supports our claim that diversifying investment into real estate is the way to go as opposed to the stock market.
The historic period for a recession is 18-22 months, so there is still a long way to go before we will see returns in the stock market. With additional interest rate hikes looming, as we mentioned earlier, most companies will be looking at declining stock prices and shrinking balance sheets for the near future.