Rate hike can benefit the housing market

The Bank of Canada announced a raise of its key policy rate by 25 basis points, up to 0.75%, marking the first hike since September 2010, in the context of an economy approaching “full capacity” and inflation expected to reach its 2% target in the next few months.

Bank of Canada Governor Stephen Poloz expressed concern about the sustainability of growth as well as US-based policy uncertainties, although delays in decision-making south of the border seem to have moved those concerns further into the background. He said it meant strong business sentiment for investment and hiring intentions, despite the lack of clarity south of the border. There is no “predetermined path” for further increases, he said, adding that the rate policy would be examined quarterly.

The rate hike will immediately impact adjustable-rate mortgages and home equity lines of credit. Hot on the heels of the announcement, the Royal Bank, Bank of Montreal, TD, Scotiabank and CIBC all announced an increase in prime rates, up to 2.95% from 2.7%. Although they’re holding for now, we may see fixed rates inch up as well.

It’s difficult to forecast future rate trends, he said, given the vagaries of President Trump and the outlook for world oil prices, but with our historically high levels of debt, it does have the potential to leave consumers vulnerable.

The Bank’s next rate announcement is set for September 6th.

There isn’t any reason for immediate concern, unless you’re stretched so tight that even the most minor rate hike can affect your cash flow, but it isn’t the time to get into further debt. If the economy continues to do well, we could see the rate get hiked again.

It never hurts to be cautious, but even the slightly higher rate is something from which the economy should benefit. It should encourage Canadians to save more. On the other hand, a higher cost of borrowing can mean an increase in production costs, which could trickle down to higher prices and make our exports less competitive.

It doesn’t mean much right now, but with its having been such a long time since we saw any kind of rate hike, it’s not a bad time to behave with a little caution.

Speaking of affordability issues

Renters in Vancouver are facing bidding wars that can get just as heated as price wars, according to Straight.com. One would-be landlord relates his experience renting an apartment on behalf of a friend who had to make a quick move to Kelowna. He started, he says, at $1,175/month because there weren’t any neighbourhood comparables, but he found himself inundated with emails. He finally got the barrage under control at $1,400/month, set up an open house, and quickly found himself with numerous would-be tenants willing to pay a little more, and willing to pony up three and four months’ rent in advance.

He finally rented the place for $1,600 and four months’ rent in advance, plus a damage deposit and a pet deposit for the couple’s cat. That didn’t stop others, who hadn’t made the shortlist, from continuing to bid, with one guy even offering a $1,000 kickback.

Anecdotally, we may be headed in the same direction. I have friends who recently went on the hunt for a rental property in the east end. It didn’t seem to matter what kind of shape the place was in or how desirable the neighbourhood — just about everything was in the $1,900 range from Rouge Hill to Oshawa.

Further east, that might have got them a detached house with a yard, while closer to town it may be a townhome or a smaller detached, but they even looked at one place on a less than desirable main street in Oshawa that had no — literally not one — closet anywhere within the property. The backyard was a scrub brush with a fence around it.

One detached home’s basement smelt so badly of mould, they were afraid they would walk away from the viewing with lung disease. One odd place in Pickering was advertised as a three-bedroom, but one of those bedrooms turned out to be more like a sunroom at the front of the house and the other a similar space at the back. Upstairs, without benefit of a door, the one actual “bedroom” (sort of) was lined with myriad doors that opened into an uninsulated attic space. There were already potential renters lining up to take it.

Hopefully whatever else the rate hike might bring, it’ll be the beginning of some sensibility in the rental market as well as the housing market.