On April 13, the Bank of Canada raised its policy interest rate by half a percentage point to one per cent—the biggest increase since May 2000. The move comes after Canada’s inflation rate hit a 31-year high of 6.7 per cent.
“Much of the inflation we’re experiencing today is coming from international factors. The war in Ukraine has pushed commodity prices higher. It’s further disrupted global supply chains, and that’s the principal reason why our inflation forecast is revised up,” said Bank of Canada governor Tiff Macklem during a press conference.
Canada’s inflation target usually sits between one to three per cent. Six per cent puts us well over, causing the price of goods and services to go up. This is because inflation is caused by an inbalance between supply and demand. Throughout the pandemic, demand for certain commodities, such as oil, dropped, so there was less incentive to drill for new oil reserves, says Angelo Melino, an economics professor at the University of Toronto. “But when the world economy warmed up, we were caught with less [oil] supply than we’ve normally had.”
The same goes for other products. During the pandemic, everyone bought items they could use from home, such as Peloton bikes and free weights. But now people are returning to gyms, bars, restaurants, theatres, etc., resulting in service inflation, Melino says. The sudden shifts in demand cause supply chain constraints, which are now being exacerbated by the war in the Ukraine.
By raising interest rates, the Bank of Canada said it expects to reach its inflation target of two per cent by 2024. Higher interest rates discourage people from borrowing money, which reduces spending, slowing down the economy, and putting the brakes on inflation. The only issue is if the Bank of Canada raises interest rates by too much, Melino says, it can stop the economy from growing and create a recession. He expects the Bank of Canada’s policy interest rate to rise from one to two per cent over the next year.
This has a major impact on mortgage rates. When the pandemic first hit Canada in March 2020, the Bank of Canada slashed its policy interest rate to 0.25 per cent in an attempt to bolster the economy. Low mortgage rates combined with the ability to work remotely and the desire to escape urban areas made cottages hot commodities during the pandemic. This demand has driven up cottage prices. In fact, Royal LePage reported that the national aggregate price of a recreational property in 2021 jumped 27 per cent.
But rising mortgage rates are expected to cool the real estate market. “It doesn’t directly affect the housing market in the sense of prices, but it does affect the buying,” says Lisa Hannam, the executive editor of MoneySense. “We are currently in a seller’s market, so it does seem a little bleak if you’re trying to get into it.”
The tapering off of cottage prices won’t happen overnight. It’s expected to be a drawn-out process, which could lead to some disconnect between buyers and sellers. “We have sellers who are holding on to the 2020 and 2021 prices,” Hannam says, “and then you have the buyers who are thinking about 2023, 2024 prices. So, you’re probably going to negotiate a lot more than you expected.”
If you are planning to buy a cottage, Hannam says that you shouldn’t solely fixate on mortgage rates. “Always think about your long term goals, and don’t make emotional purchases. Look at the hard facts of buying real estate. There are things in addition to the mortgage and the down payment. You have to look at property taxes, maintenance, electricity, phone bills, cottage association fees, and cottages tend to be older than a primary residence, so there may be renovations,” she says.
“The mortgage rate changes will come into play, but don’t get sidetracked from the overall cost of a cottage.”
