JANUARY 2023
Vine Group Executive Market Commentary
Happy Lunar New Year! As we welcome the Year of the Rabbit, we wanted to take a moment to reflect on the past tumultuous year and look ahead to the real estate market in 2023.
A new year brings a fresh perspective, and the rabbit is associated with good luck and prosperity, which will be highly coveted looking forward to this year.
On January 25, 2023, the Bank of Canada (BOC) kicked off the year with another (and possibly final) rate increase of 0.25%. This takes the overnight rate to 4.50%, a 15-year high.
The Good News
The BOC commented that it expected to hold off on further rate hikes, making it the first major central bank to signal this message to the market. BOC advised that it would continue monitoring data (particularly inflation) and apply additional increases only if needed.
This sends a very positive message to the market, particularly real estate buyers and mortgage holders who have been taken for a bit of a wild rate with record rate fluctuations.
The BOC expects inflation to decrease to 3% (from 6.30%) by mid-2023 and return to its target of 2% by 2024.
Markets are already pricing significant rate cuts starting later 2023 and throughout 2024 that would see rates return to a “neutral stance” by 2025:
Some notes from the Bank of Canada press release
- Canadian economic growth has been stronger than expected but remains in “excess demand.”
- Labour markets are still very tight, unemployment is at historic lows, and businesses are having difficulty finding workers.
- BOC estimates that Canada’s economy grew by 3.60% in 2022, with expected growth in 2023 of 1% and 2% in 2024.
- Inflation declined from 8.10% in June 2022 to 6.30% in December 2022, with lower gas prices helping drive down costs.
- Expectations for inflation are to come down to 3% by the middle of 2023 due to lower energy prices, improvement in global supply conditions and an overall economic slowdown due to current higher rates.
What the rate increase means for consumers
The overnight rate increase will impact loans linked to Prime, which for the most part, will increase to 6.70% (up from 6.45%). Typically, variable rate mortgages and HELOC (home equity line of credit), line of credits will all be impacted by an increase in Prime.
If you have a fixed mortgage rate, you won’t see an impact or change to your regular payments.
Trigger Rate
Be mindful of the Trigger payment, which will affect many borrowers with this rate increase who haven’t seen any changes to payments on their variable-rate mortgages. This is for borrowers with a variable-rate mortgage with a lender where monthly payments don’t increase when Prime goes up (compared to an adjustable-rate mortgage where your payments will move with Prime increases).
To make matters even worse, we’ve seen several clients with amortizations well over 30 years (some over 75-year amortizations!).
Looking ahead – is this the peak?
The good news from the latest Bank of Canada announcement is that this could be the end of rate hikes, and we could also see rates begin their descent later this year.
This means that many home buyers on the sidelines waiting to see how things play out could have more confidence in moving forward with a home purchase as they can more effectively budget for monthly payments as rates are not expected to spiral up.
Is this the best time to be buying real estate?
Rate-sensitive markets like real estate have fallen over 20% depending on the individual market due to these rate increases. This is an excellent opportunity for investors and new home buyers to take advantage of much lower real estate prices despite the current higher mortgage rates. It’s worth noting that despite much higher rates with lower purchase values, the monthly payments in many cases are very similar.
Despite higher rates, the main value of the current real estate market is that buyers can obtain real estate discounts of 20%+ (depending on the market) with modestly higher monthly payments to service higher current rates.
Taking the average Canadian sold price, a buyer today would save almost $160,000 on the down payment despite having a higher monthly payment of $257.
With a short-term rate strategy, this buyer can lock in a 1-2 year fixed rate to ride out the current rate cycle and then be in a position to renew/refinance at future lower rates.
Whereas waiting until rates come down, we could see real estate values return to growth, which would mean higher down payment requirements and more competition, especially as Canada expects to see a boom in immigration with more demand for housing over the next few years.
What we have been suggesting to clients
- Consider a short-term fixed-rate between 1-2 year terms. These are very digestible periods where planning becomes much easier (you’re less likely to sell in a short time frame or suddenly have to break your mortgage or make significant changes). These short terms will also coincide with where most economists see rates coming back down so you can be in the best position to renegotiate your terms moving forward.
- Consider a 5-year variable/adjustable rate. If you want to get the lowest possible rate these days but are okay with rate fluctuations, this is still the most attractive option historically over the long term. A 5-year variable/adjustable-rate term will likely do much better than locking into a 5-year fixed rate, which on average, is sitting in the mid-5 % range these days. Variable-rate terms that are “insured” or have less than a 20% down payment are some of the lowest rates in the country.
- Convert to fixed – If you have a variable/adjustable rate with a short time to maturity (let’s say, 1-2 years), consider asking about converting to a short-term fixed rate to hedge against future increases. Many lenders allow this option without a penalty or a new application to be completed.
- Consider a HELOC. HELOCs are often used to fund renovations, investments and for emergencies, but they can also be used to carry your traditional mortgage balance. Instead of borrowing with a mortgage on a fixed or variable term, a HELOC allows you to have a fully open, interest-only option. This means that although your payments are adjustable (linked to Prime), you will only have to make minimum monthly interest payments which could allow you to increase cash flow significantly. Eg – On a $500K HELOC, compared to a mortgage, you are paying $375/month less. All of this is going towards interest and not the principal, but it allows you to improve cash flow in times of uncertainty and then convert to a regular mortgage when rates are more attractive.
The next Bank of Canada announcement is scheduled for March 8, 2023.
A financial review is key to ensuring you can navigate the current climate. If we haven’t already, let’s chat and see how we can help.
We’re all in this together and will come out stronger together.
VINE GROUP – MORTGAGE ALLIANCE
vinegroup.ca
ON LIC. 10530 SK LIC. 316209
Sources
- https://www.bankofcanada.ca/2023/01/fad-press-release-2023-01-25/
- https://www.theglobeandmail.com/business/economy/article-bank-of-canada-interest-rate-announcement-2023-macklem/
- https://economics.cibccm.com/cds?id=557f0af4-6027-4cca-8077-19758ec88586&flag=E
- https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.economic-indicators.scotia-flash.-january-25–2023-.html
