Few people, if any, have a proverbial ‘crystal ball’ to determine exactly what the Bank of Canada will do with interest rates in the coming months and years. What strategic investors can do is pay close attention to the influencers of Canadian monetary policy to better grasp what may happen, and plan accordingly.
Our underwriting practice currently includes CMHC-insured rates in the 4.5% to 5.25% range. While commercial rates are less correlated to the prime rate set by the back of Canada, it does indicate where the 5-year bond may be headed—which is the base rate used by commercial lenders to price long-term fixed mortgages.
One of the primary influencers of monetary policy in Canada is inflation—and knowing this will help you better understand what may likely happen during the next Bank of Canada rate announcement.
Inflation
One of the Bank of Canada’s key responsibilities is to keep inflation under control at a neutral rate that hovers around 2% per year. As of today, the most recent national inflation number is sitting at 6.9%. While inflation has gradually subsided from its peak of 8.1% in May 2022, we are still far off from the target.
The Bank of Canada uses interest policy as one of the primary means to impact inflation as measured by CPI (consumer price index). As long as the inflation rate is high, we can expect the Bank of Canada to continue increasing rates to tame inflation.
Impact of Monetary Policy on Rental Demand
While growing interest rates do increase the cost of capital (cost to service debt on real estate)—putting pressure on cash flow on properties with newly placed debt—it is placing upward pressure on rental rates in key markets.
Even though residential home prices have subsided in the last few months primarily due to the increasing cost of borrowing, housing is still relatively unaffordable to purchase for many. With an increasing number of people entering Canada as immigrants and an already under-supplied housing market, debt unaffordability continues to direct many people looking for homes into the rental market—increasing demand and driving up rental rates.
Stay tuned for future blog posts that will address other frequently asked questions!
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About the Author:
Mark Baltazar, Co-Founder of Peak Multifamily Investments
With 18 years of experience in business strategy and corporate consulting on the global stage, Mark brings a wealth of business management and operational expertise to real estate investing. Winner of the Real Estate Investment Network’s Top Player Award in 2017, Mark continues to build strong momentum in growing his real estate portfolio.
His strong analytical background enables him to bring a strategic rigour to portfolio expansion and the assessment of investment opportunities.
With five years of real estate investing experience across various strategies, Mark oversees Peak’s capital raising, client acquisition, partner relations, educational content development while ensuring the company delivers on its promise of helping others build generational wealth through apartment building investing.