Bank of Canada makes its biggest key interest rate hike in 20 years!
As expected, the interest rate was increased from 0.5% to 1%.
And this definitely won’t be the end of it.
We can expect the rate to go up to around 2% by the end of 2022.
Do you remember what the rate was just before the pandemic in 2020?
It was at 1.75%.
You see, we’re essentially just going back to where we were 2 years ago in terms of the interest rate.
During these 2 years, average detached home prices in the GTA have gone up 53%.
Average townhouse prices up 50.9%.
Even condo prices are up 22.7%.
Now that interest rate is going back up to the pre-pandemic level, does that mean home prices are going to roll back to the pre-pandemic level as well?
Let’s take a look at one of the biggest underlying problems in Canada.
That is…
An aging population.
As of today, in Ontario, 1 in how many people are over 60 years old?
1 in how many? [Wait 3 seconds]
1 in 4 people.
So around 25% of Ontario’s population is over 60 years old today.
What about 10 years later?
1 in 3 people.
So 10 years later, over 30% of Ontario’s population will be over 60 years old if we just rely on our natural birth rate.
You see, we have a very serious problem here.
The younger generation would have to pay a lot more taxes in order to support the older generation.
The government can’t let that happen, right?
And since relying on our natural birth rate won’t work, there’s really only 1 solution to the problem.
Immigration.
That’s exactly why the government is going all in with immigration.
Let me share more data with you.
Canada’s current population is around 38 million people.
We have 10 provinces in Canada. If the 38 million people are evenly distributed, each province should have around 3.8 million people, right?
How many people do you think Ontario has?
[Wait 3 seconds]
14.9 million people.
So just the province of Ontario alone gets around 40% of Canada’s population.
Canada’s immigration target is over 400,000 people per year for the next few years.
And Ontario is going to get around 40% of that, so roughly 160,000 to 180,000 people per year will be added to Ontario.
All those people need a place to live right?
How many housing units can Ontario build every year?
Only 60 to 80,000 per year.
That’s a significant under supply for 180,000 new Ontarians every year.
Let alone that there are more than 300,000 first time buyers who are already living in Ontario and waiting to purchase a home.
You see, we’re facing a very serious underlying housing problem even if we didn’t have the pandemic.
Here’s the thing.
The pandemic accelerated the problem and made it worse.
Over the past 2 years, the government has been printing $3 billion dollars every week.
More than $370 billion dollars has been pumped into the economy.
Plus, the cost of borrowing money has been so cheap because of the low interest rate.
People were stuck at home and had nowhere to spend money.
There were so many incentives for people to put money into the real estate market.
And then construction costs are going way up because of inflation and global supply chain issues.
So as a result, we saw a more than 50% increase in low rise home prices in just 2 years.
A $1 million dollar townhome 2 years ago is now worth $1.5 million dollars.
That’s too steep of an increase within such a short period of time.
We can’t magically increase supply immediately.
So the government has no way out, they have to do things on the demand side for a more immediate effect, which might also be temporary.
I actually think it’s a great thing that we’re having a little bit of a pause on the market right now.
The rate at which things were going up was too unhealthy.
That being said, I can’t see how prices can come down significantly with the underlying population problem we’re facing.
I mean if the government has the power to just flip a switch and tell prices to come back down, we wouldn’t be facing skyrocketing prices in the first place.
The best they can achieve is probably just to slow down the price increases, maybe just 10% per year instead of 25% a year.
It’s going to take some time for the market to absorb the interest rate and policy changes, plus people can now go out to do things and travel is getting easier…
So prices may dip a little bit this year, especially in the low rise market.
But the general trend would still be up, it would just increase at a slower rate than what we’ve seen in the past 2 years.
If you own properties, make sure you hold on to them.
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