This year we’ve seen all-time low mortgage rates in Canada. It has led to both increased real estate activity and home prices. With people getting lower rates and plenty of time to save this year, they’ve been ready and willing to pay, thus growing the demand for real estate inventory and fueling a seller's marketplace.
Since the start of 2021, Canada has seen the inflation rate rise more than expected, reaching an 18-year high in October at 4.4%. This was higher than predicted and is generally expected to keep rising slowly over the next year. Inflation means there’s more money available, making it worth less. This means good and services prices usually increase in response. You may have seen headlines recently around the price of goods increasing, such as groceries, gas, and vehicles. It also has the same effect on real estate and mortgage rates, which we’ll go into below.
The relationship between inflation and real estate
With increasing inflation making money worth less, it’s likely that prices will increase to compensate for it. This is especially true with real estate being a finite amount. For example, if the dollar is worth less and the price of a home stays the same, the selling price is likely to increase to make up for it. And then there’s the value of real estate continuing to increase for other expected factors such as supply-and-demand. This change in the dollar’s value may also cause rental rates to increase.
The relationship between inflation and mortgage rates
The beginning of the pandemic brought a historically low mortgage interest rate. As we shift into a more recent recovery phase, it has meant we’ve seen an easement on quantitative easing, a target inflation rate to stabilize the economy, and an inevitable increase to mortgage rates. The mortgage industry knows this, and understands that mortgage rates and inflation rates can rise and fall together. This can mean an increase for variable rate mortgages. Fixed rate mortgages are less likely to be affected until the homeowner decides to refinance or move. In terms of forecasted mortgage rates for the near future, the Bank of Canada already indicates a small increase in rates over the next 12 to 18 months.
Note while this all may sound like pressure to secure a mortgage now, these predictions can change. Scott Gingles, founder and managing director of Nest Mortgage, had this to say:
“Our prediction is that within the next 12 to 18 months we're going to see obviously a small increase in rates as the Bank of Canada has been indicating, but they should be in line with where rates were prior to the pandemic.”
As we approach the new year, mortgage brokers and real estate professionals will monitor which direction rates end up going and see how housing affordability appears to be impacted. To learn more about the potential future of mortgage rates and inflation, watch our Real Estate Intelligent Series featuring Scott Gingles from Nest Mortgage.
By MLA Contributor Simon Gerard
