Bank Of Canada Hikes Rates Lower Than Expected In October!
Another Bank of Canada rate hike just happened today. It was expected to be between 50 to 75 basis points. The market indicated a 75% chance of a 75 basis point rate hike, and I can’t believe it, the 50 basis point camp won!
So as of today, our policy rate just went from 3.25% to 3.75%, lower than expectations. I think the more important bit that everyone is looking at it to see if the central bank has shifted gears, and what their updated projections are for GDP growth and CPI inflation expectations.
They did release their monetary policy report today which comes out every other meeting, so let’s dive into that to see if we can get more insights on where they might be headed.
Front Loaded Rate Hikes
Starting July, that’s when the Bank of Canada first said they will front load rate hikes to bring inflation down, and they held onto their word. We saw 100 basis points in July, 75 basis points in September and now we have 50 basis points in October.
They did say that inflation is still high and so they will continue to raise rates, but if this continues, we’ll hopefully see more normal stepped rate hikes at 25 basis points each time, and the next one is scheduled for early December.
If you go on the bank of Canada website, you do see CPI numbers but that’s usually the headline CPI number that includes energy and food, which really are the most volatile parts of inflation. What we have been seeing is headline CPI coming down, but when you break down the numbers, it comes from energy prices dropping.
So the first take away from BoC today is that they’re going to be focusing more so on core CPI, which still remains close to the peak at 5.4% as of September, so we’ll likely need to see that number start to come down more before they stop.
CPI & GDP Projections
Going through their monetary policy report, I think everything looks a lot more reassuring and we are moving towards the right direction. The jumbo rate hikes takes time to kick in. And what you see is that the Bank of Canada adjusted down their inflation expectations from the previous report, which means things are actually better than expected.
Right now, they expect CPI on average is expected to be around 6.9% this year, and the average right now is at 6.8%, so they actually don’t see inflation changing much for the rest of this year. Next year, 2023, inflation is expected to come down, averaging 4.1%, by the end of the year reaching 3%, which is the upper range of the inflation target. And then in 2024, rates are going to actually get back on target.
As these major interest rates kick into effect to bring inflation down, we all expect a recession next year and so does the BoC at this point. They’ve updated our GDP growth forecasts. For next year, 2023, GDP is only expected to be at 1%, and then in 2024, it would go up modestly to 2%.
I think one big thing here is that things are getting more predictable. The BoC seems more confident, now that the inflation momentum is slowing, and they’ve even revised down their inflation targets. Business inflation expectations as a whole is also stabilizing. In the past report, inflation expectations kept going up but now we’ve remained more or less at the same average spot, and the it’s reaching more of a consensus and all of these are positive signs for real estate investors too.
What This Means For Real Estate Investors
The biggest thing that will prop up the investment property market is when the interest rate uncertainty starts to go away, and we’re getting there. Once the moving target is stabilized, more and more investors will know how to value purchases, and that’s going to make investor demand pick up.
The other question I sometimes get is if the looming recession will impact rents. It’s true that this rent growth we’ve been seeing this year is not normal, and it’s moving relatively in line with inflation. The outlook is that interest rates might be peaking soon but they’re not coming down anytime soon.
So, this isn’t a repeat of 2020, where rents dropped because renter demand came down and supply came up. We don’t see renters rushing to become home owners at these high interest rates still, and we don’t see a lot of new investors ignoring rent yields and purely speculating on price since lending is still going to be tight at these higher rates. What we do expect is that rent growth will start to slow down in 2023, and eventually grow more in line with the target inflation rate of 2% in the long run.
In these situations, the big winner does end up being the real estate investors because you’re getting returns from two buckets that are actually inversely related. When the economy isn’t looking so good, real estate prices shouldn’t go up quickly but you do make up for it with a strong rental market because renters are deferring to buy and end up renting for longer.
When the housing market recovers, you end up seeing the opposite. Even though rental demand and income might slow down, you gain in appreciation. Basically, once investors get more clarify on how to price real estate, demand should come back because rental properties does make a well-rounded long term investment that’s strong in various economic environments.
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