August 22nd, 2023 | Housing Markets

Market Update August 2023 – Understanding the Impact of Inflation on the Housing Market: Insights and Opportunities

The Bank of Canada’s recent inflation data has sparked discussions about the potential implications for the housing market. With an increased inflation rate and bond yields rising, investors are betting on the likelihood of further interest rate hikes. In this blog post, we will delve into the potential consequences of these economic changes and explore the opportunities they could present for individuals in the real estate market.

The Rise in Inflation and Bond Yields:

The inflation rate in Canada climbed from 2.8% to 3.3% between June and July, leading to an immediate increase in bond yields. This can be seen as a warning sign, indicating that investors anticipate further interest rate hikes by September. The Chief Economist of CIBC, Benjamin Tal, suggests that the Bank of Canada may have intentionally overshot the inflation target to account for potential future adjustments.

The Role of the Bank of Canada:

To manage inflation and stabilize the economy, the Bank of Canada has several tools at its disposal. It can introduce more capital into the economy through quantitative easing. However, if inflation spirals out of control, interest rates may need to be raised even higher than the present levels, which could have long-term implications.

Managing Expectations:

An additional rate hike in September is likely due to the importance of expectation setting. By signalling that higher rates will persist, Canadians are more likely to manage their spending, which helps put downward pressure on inflation. The real estate market, especially during the fall, could be significantly influenced by such rate expectations.

Factors Influencing the Housing Market:

Gas prices, although not immediately impactful on inflation data, can eventually contribute to increased costs across various sectors. By addressing this potential inflationary pressure ahead of time, the Bank of Canada may aim to prevent further complications. Moreover, strong retail sales in the US could result in the Federal Reserve considering additional rate increases, indirectly affecting the Bank of Canada’s decisions.

Implications for Housing Market Participants:

In terms of housing, the effects of these economic changes differ for houses and condos. House prices are anticipated to stagnate in the fall and well into 2024, with exceptions based on unique features, renovations, or lot size. Condo prices, however, are expected to experience a decline due to pre-construction investor/speculative purchases made in the past few years and an increase in completed and resale units.

Seizing Opportunities in the Housing Market:

Despite the challenges posed by evolving market conditions, there will always be opportunities for buyers and sellers. Distressed sales may rise, particularly in the pre-construction and assignment sectors, while some sellers may aim to sell ahead of potential downturns or further rate hikes. Those with available capital may find themselves favourably positioned to capitalize on these opportunities.

While the current economic climate presents challenges for the housing market, it is important to approach the situation with realistic expectations and make decisions based on personal circumstances and market outlook. Understanding the impact of inflation and interest rates can help individuals navigate the market strategically. For personalized advice, feel free to reach out to us – we are here to assist you in making informed decisions about your real estate needs.