The inevitable interest rate hikes after covid are now upon us. The Bank of Canada in its effort to keep our economy going reduced rates almost to zero. It worked as a temporary measure , but could not last forever. Historically, the median for interest rates is around 7%, so anything below that is a bargain. It was also anticipated that inflation would rise after Covid, but it is going a little faster and higher than anticipated. Acceptable inflation is 1.5 to 2.5%, today we are at 8% and rising. The bank has really only one tool to combat inflation, and that is the interest rates. We have seen them move quickly, and that will continue. We will be back in the 6% range for mortgage rates before the dust begins to settle.

The media is portraying a scenario where no one can afford their homes and will be forced to sell. They forget very quickly that the stress test was implemented to prevent this. Basically everyone that received a 2% mortgage was stress tested at 4%. All buyers can afford a 2% bump. Also, if rates were to move up 3% over the next 2 years, it would be in line with wage hikes to offset that. Canadians will find a way. Arrears today in Canada are less than .05% and have been so for the past decade. Very few will be forced to sell.

What usually follows high inflation and rate hikes? A recession. This also happens every decade or so and in some ways is a reset for businesses. It will force them to be more diligent , cost effective, profit minded, and perhaps will weed out the weaker players. House prices have dropped to where they probably should have been anyway. Many buyers overpaid in a heated market just to get into a home. This is now over. Canada has a severe housing shortage, inventory of resale homes is still very low, and I do not expect prices to dip any more than 5%. Some ares will be worse, some will be better. Real Estate, especially for the rental market is still one of the best long term investments you can make. Rents are going up and will continue un til Canada can get caught up with new construction. That could take decades.

Overall, the higher rates are normal, the low rates were temporary. Canadians will still pay their mortgages, they will stay employed and try to fill the job vacancies that are abundant. They can ask for higher wages in this environment. It is nice to see normal again, but it has been a crazy 2 years.